Has the oil price bubble burst?

Brent has been to the sky and back in less than three months. The Memorandum of Understanding (MoU) between the US and Iran has raised hopes that a worst-case outcome for the global economy has been averted. Oil market sentiment has moved sharply negative in recent weeks in anticipation that a relatively benign outcome might be achieved, close to the Quick Peace scenario we outlined in the May 2026 Horizons. I asked our Macro Oils experts, Alan Gelder and Andrew Harbourne, how they think things will play out from here.

What are the risks to the Strait of Hormuz reopening?

The MoU, signed last week, lays a foundation for a comprehensive agreement to be negotiated over the next 60 days. Both sides agree that the Strait of Hormuz should be reopened. Nevertheless, these are high-stakes negotiations for a global economy teetering on the brink after three months of high energy prices.

Tensions abound – not least, Israel’s apparent rejection of restrictions to its ongoing action in Lebanon. Other bones of contention between the US and Iran surround the timing and manner of reopening. The US administration hopes the Strait will be reopened within two weeks to 30 days; Iran’s state press has said it will “reopen under Iranian arrangements”. Iran’s intention to limit transit to seven-hour weekday times shows it believes it still has leverage.

There is a risk that negotiations have to be extended or perhaps even fail. Even if successful, the future terms of transit through the Strait could be very different from the free flow of vessels before the war.     

What part did oil market fundamentals play in reaching the MoU?

An important one. The market has relied on inventory drawdown to subdue price in the absence of over 11 million b/d of crude production (plus 3 million b/d of refining capacity for product exports). Drawdown of both commercial and Strategic Petroleum Reserves was accelerating towards a crisis point. With US oil inventories at Cushing close to its operational floor, President Donald Trump acknowledged on 15 June that “we run out of reserves in about four weeks”. Much of the rest of the world has anticipated a similar, looming crisis point.

Is the sharp drop in Brent price surprising?

It’s not justified on immediate fundamentals – very little additional oil has started to flow through the Strait based on our vessel tracking data. However, the direction of Brent was always going to be binary. Prolonged closure would lead to an exponential rise above US$150/bbl in the coming months; the prospect of reopening has burst that bubble. In the four weeks to 16 June, investor positioning for higher Brent prices fell by around 80% from a five-year high that had held for much of the crisis.

How quickly could the market get back to ‘normal’?

It will take months. The first critical step is for shipowners and crews – as well as insurers – to be assured of safe passage through the Strait. The risk calculus for outbound transit of vessels trapped for weeks is more compelling than that for inbound transit, where shipowners must gamble on the strait remaining open long enough to re-emerge. Our Vessel Tracker analysis suggests that ships of all categories passing through has increased from the low teens per day to a peak of 35 on 18 June, promising but still well short of pre-war numbers.

Once the Strait has reopened, demand will surge, from refiners desperate to lift utilisation rates to storage operators, refiners and governments eager to top up commercial inventory and strategic petroleum reserves. Around 60 million barrels of oil held in vessels trapped in the Gulf will quickly reach consumer markets once the Strait is deemed safe for transit.

The full value chain in the Gulf will take some time to ramp up, from wellhead through midstream to the refineries and the reloading of vessels returning to Gulf Cooperation Council ports. Our May analysis suggests 70% of the 11 million b/d-plus of shut-in production could be back onstream within three months, and 90% within six months. The final one million b/d will take considerably longer.

Where do Brent prices go from here?

The trend is down over the next 18 months with Brent averaging US$92/bbl in 2026 – buoyed by the elevated prices of March through May – and US$78/bbl in 2027 on our latest forecasts. This assumes transit flows through the Strait of Hormuz normalise during August. Even if demand bounces back towards our forecast 105 million b/d next year, the market should be well-supplied. Brent may slip to US$70/bbl by Q4 2027.

Getting there, though, will be a bumpy ride. Alternating periods of elevated and depressed prices are likely as the market searches for equilibrium with recovering demand, inventory build and supply out of sync.

What are refining margins telling us?

Things are better but far from back to normal. Stratospheric jet crack spreads of US$100/bbl when the Strait of Hormuz was initially closed reflected deep concern of supply availability. Jet cracks have eased progressively in the last two months as the worst fears of feedstock shortages did not materialise. However, current jet crack spreads are still almost double pre-war levels. This suggests two lingering issues: concerns about product availability and refiners that can deliver jet fuel to customers while Gulf exports remain constrained will continue to print money.

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