Oil has returned to the levels seen before the armed conflict in the Middle East much sooner than expected. Brent’s fall of almost 40% from its March highs is not solely due to more barrels coming from the Persian Gulf. The market has adapted to the most far-reaching crisis in the history of the oil market. As a result, traffic through the Strait of Hormuz need not return to previous levels to restore balance. A return to 65%, or 11-12M BPD, will be sufficient.
Morgan Stanley put forward this assumption and lowered its forecast for the average Brent price to $75 per barrel in the third and fourth quarters, a $15 and $5 lower than its previous estimate, respectively. According to the bank, while more barrels are flowing through the main oil artery, the bears’ previous trump cards remain in play. These include record growth in US exports and a decline in Chinese energy imports.
The Gulf states’ search for alternative routes has made it possible to partially meet demand from Europe and Asia for the next couple of months. These continents do not require any more oil. The Iranian output could also surge to 3.3M BPD by the end of the year, following the lifting of sanctions. Combined with the gradual recovery in regional production, this creates a distinctly bearish backdrop for Brent.
There is no doubt that the market will stabilise over the coming weeks. It will need to replenish global stocks, which have been considerably depleted, and meet growing demand from Europe and Asia. Oil prices could even rise if the conflict in the Middle East escalates. If the conflict does not escalate further, the long-term outlook for Brent looks rather bleak.
According to estimates from the International Energy Agency, global crude oil supply in 2026 will fall by 3.9M BPD in 2026. Supply is expected to increase by 8M to 110.3M BPD in 2027. Demand will recover at a much more modest pace, and next year the oil market risks facing a surplus of 5M BPD.
Thus, barring an escalation of the geopolitical conflict in the Middle East, the downward trend in Brent is likely to persist.
The FxPro Analyst Team