Why banks hold the key to the energy transition amid oil glut

The Green Hydrogen Plant built by Spanish company Iberdrola in Puertollano, Spain. Banks must shift to smarter financing models that reflect where energy markets are going. AFP

As we go deeper into the second half of 2025, global energy markets continue to contend with a fundamental mismatch: accelerating supply growth amid structurally weak demand. For energy financiers, this disconnect poses a growing challenge.

The role of banks must evolve − moving beyond short-term supply optimism towards long-term capital discipline, strategic selectivity and a greater focus on transition readiness.

The recent expansion in oil output − driven both by Opec+ production increases and the US’s assertive Triple-3 economic strategy − is real and material. Unlike previous symbolic adjustments, we are now witnessing the addition of fresh barrels into a market that is already under pressure.

Demand growth on the other hand remains underwhelming.

Economies in Europe continue to contract, while China is structurally rebalancing its output away from heavy industry. The traditional engine of Asia-Pacific growth has also sputtering.

These are not cyclical signals. They are long-term indicators of a more efficiency-driven and lower-consumption future.

Sheikh Hamdan bin Mohammed, Crown Prince of Dubai, has launched the first operational phase of the Dh4 billion waste-to-energy power plant in Dubai. All Photos: Dubai Media Office

The facility is located in Warsan and is the largest and most efficient in the world

The renewable energy plant is capable of generating 220 megawatt-hours of renewable energy and can process two million tonnes of waste per year without harming the environment

The facility, in its first operational phase, is set for completion next year

This evolving reality is already reflected in the market behaviour. The forward curve of oil has shifted into deeper contango – a situation where price of a commodity futures contract is higher than the spot price of the underlying commodity – which is a clear signal that market participants expect supply to continue outpacing demand.

This presents serious implications for investment planning.

In high-cost regions, profitability is being squeezed. Volatility in the bond market – exacerbated by widening US fiscal deficits – has raised borrowing costs and introduced a new layer of caution in capital flows. Meanwhile, geopolitical uncertainties continue to shape supply strategies and contribute to internal tension in key producing alliances such as Opec+.

For financial institutions, this context calls for a more calibrated approach.

IEA chief Fatih Birol warns deficit in copper threatens clean energy transition

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Energy security remains important, but blanket support for production-led growth – particularly in already saturated segments – risks overextending capital and misallocating resources.

The focus now must shift to smarter financing models that reflect where energy markets are going, not just where they have been. That includes working with industrial clients transitioning to lower-emission operations, and promoting green and sustainability-linked structures that balance performance, transparency and climate alignment.

A recent example from the UAE steel sector illustrates this shift in action: a major green financing package was extended to support the country’s largest private-sector low-emission steel producer.

This type of transaction shows how financial institutions can prioritise long-term efficiency and clean industrial growth, even as short-term market signals remain volatile.

More broadly, a clear commitment to sustainable finance – guided by national targets and institutional pledges – is shaping how transactions are structured, risks managed and clients supported through the transition.

Even in the face of oversupply, it would be a mistake to see today’s market as a reason to pause or pull back. Rather, it is a prompt to be more selective, strategic and forward-looking in how we fund energy activity.

Regions like the Gulf remain key, both for current energy resilience and future transition leadership. Financial institutions with deep sector knowledge and an appetite for innovation-led solutions are uniquely positioned to support this dual objective.

Looking ahead, the imperative for energy financiers is not to simply chase scale or production volume. The goal is to ensure that capital is enabling projects that are viable, resilient, and adaptable to the shifting contours of global demand. That means supporting clients in making prudent investment decisions, accelerating clean technology adoption, and protecting long-term value through disciplined financial structuring.

As energy markets transition from volatility to oversupply, and from rapid expansion to structural realignment, banks must adjust as well – committing to finance the energy sector’s future responsibly and in alignment with broader sustainability goals.

Sajjad Jafri is head of energy and commodities business at Mashreq