Will Oil Prices Decline as Middle East Supply Recovers?

Summary

• A barrel of dated Brent crude scheduled for delivery in the next month trades at more than $130, while benchmark Brent futures recently exceeded $100.
• Physical prices remain elevated due to supply escalation threats and near-record-low global inventories fueling strong restocking demand.
• Struyven estimates that spot prices for Brent crude include a nearly $25 risk premium on top of fair value due to potential supply curtailment and inventory drawdowns.
• Potential targets for escalation include oil infrastructure such as ports, pipelines, and oil fields in Iran or by the Houthis.
• Increasing demand for oil as a hedge for portfolios, driven by the sensitivity of global stocks and bonds to oil prices, contributes to high prices.
• Researchers forecast a shift to a surplus in the global crude oil and liquid fuels market in the fourth quarter of 2026 and in 2027.
• The oil market was nearly balanced in September, with demand exceeding supply by just 0.3 mb/d, a dramatic easing from the 7.2 mb/d supply deficit in March.
• The market's return to balance resulted from higher non-Gulf oil production, a decline in global oil demand, and a surplus in 2025.
• Global oil demand declined by roughly 1.3 mb/d in September 2026 compared with the 2025 average as oil prices climbed.
• Persian Gulf oil shipments are expected to trend higher as producers adapt to the conflict with added transportation resources like pipelines and a larger tanker fleet.
• Oil demand in the third quarter of 2026 was down by 3.3 mb/d year-over-year, with weakness concentrated in China, the Middle East, and OECD Asia.
• Global oil demand in the third quarter was nearly 4 mb/d below its hypothetical path without the oil shock from the war in Iran.
• Analysts assume 80% of the demand gap will unwind by the fourth quarter of 2027, narrowing the dropoff in demand to 0.7 mb/d.
• The expected 0.7 mb/d hit to global oil demand in the fourth quarter of 2027 reflects accelerated behavioral changes, including increased use of electric vehicles and trucks in China.