After the energy crisis of 2022, we'd all hoped that oil prices above $100 a barrel were a thing of the past. A good two to three years of relatively low prices in and around $80 a barrel helped to power the post-pandemic recovery across the world. But with Israel and the US's latest war against Iran, energy insecurity has reached a nadir. On 19 March, Brent crude oil sat at $113.61 after briefly exceeding $120 the previous week. That's up just over 60% in less than a month, while similar percentage gains have been noted across a wide basket of crudes. In addition to attacks on a number of energy facilities in the UAE, Qatar and Saudi Arabia, effects also include the closure of the Strait of Hormuz, which transits at least 20% of the world's oil supply. The narrow channel remains closed to all ships serving the US and its allies.
And despite it initially appearing as if prices had cooled somewhat since the major spike on 9 March, we've seen both WTI and Brent gradually creep back up to that local high over the past week as a resolution to the conflict remains elusive. Although a swifter end to the crisis might well have been originally priced in, it's important to note that the longer-term fundamentals, once this black swan event dissipates, point to oversupply. In the meantime, there are other levers to bring prices under control, such as the opening of alternate supply channels, production increases and sanction removal. In this piece, we'll look at all of these factors and more as we attempt to predict where prices might be headed in the medium term.
Playing the long game
As easy as it can be to think that a crisis will go on forever, it's rarely the case. And with a commodity like oil that's crucial for all economic activity and has producers across various geographical regions, normal market forces will ensure an equilibrium is reached sooner or later. Though the Gulf is certainly a major production hub, it's only responsible for around 28% of the world's total supply, and some of that market share is undoubtedly attributable to its typically low price. In the current context, US and South American oil becomes much more attractive, and output can easily be modified to meet demand. US production is already forecast at near record highs of around 13.6 million barrels per day (mbd). That number doesn't account for the potential for increased shale production while prices remain high enough to make this viable.
What's more, despite solid demand growth, this indicator remains moderate at around 1.4 mbd and comes mostly from non-OECD economies. That means that producers like the US, Brazil and others are incentivised to take advantage of these elevated prices while they can by increasing production, which, in turn, will inevitably cause prices to fall since demand was already struggling to keep up with supply before this short-term geopolitical flashpoint emerged. It's true that much uncertainty remains about the extent and duration of the present conflict, which could mean more spikes in the immediate future, but several banks, including JP Morgan, still expect prices closer to $60-$70 a barrel later in 2026. Barring an unprecedented escalation in the conflict in the Middle East, it seems like this scenario is much more likely than $150+ oil.
What goes up must come down
As we already touched upon above, the high price environment in and of itself stimulates lower prices as producers take advantage of the opportunity for short-term profit. However, in addition to increasing output in distant producing countries like the US and Brazil, even OPEC+ has indicated that it will be continuing its gradual production increases despite the risk to key Gulf infrastructure. The extended version of the cartel, which includes Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria and Oman, has agreed to increase its combined production by 206,000 barrels per day in April, citing a steady global economic outlook and low oil inventories. Global supply is now expected to grow by around 2.4 million barrels per day in 2026 if current plans hold. It's also important to note that it's largely only US allies in Europe and Asia that have been affected by the blockade, as the Iranians are allowing passage to all non-aligned tankers, and the US and South America have sufficient local production.
In the unlikely event that the conflict drags on for another month or longer, there are still more levers that governments can pull to bring prices under control, such as releasing more from strategic reserves or waiving sanctions on Venezuelan and Russian oil to ensure demand can be met until Middle East supplies can resume. The IEA has already released a record 400 million barrels from its reserves, and Washington has waived sanctions on seaborne and India-refined Russian oil, which is largely responsible for the pull-back from local highs. Such initiatives could easily be expanded if market conditions require, lending more credence to the belief that we've already seen the ceiling in the oil market this year.