Morgan Stanley has substantially reduced its oil price forecasts for the coming quarters, attributing the changes to an interim deal between the US and Iran that has led to the reopening of the Strait of Hormuz. This deal is poised to revive regional oil output and boost global supplies sooner than previously expected. Both Morgan Stanley and Goldman Sachs Group Inc. have lowered their guidance for crude prices in the final quarter of 2026, with Goldman Sachs anticipating a full recovery in Middle Eastern supply by the end of July.
Specifically, Morgan Stanley's equity analyst and commodities strategist, Devin McDermott, revised Brent forecasts downwards. The bank now expects Brent to average $90 per barrel in Q3, down from $100, and $80 per barrel in Q4, a cut from $95. This comes after WTI prices already fell 29% (roughly $30 per barrel) since the US and Iran announced a ceasefire in early April. The bank estimates that 50% of disrupted production will return by September and 80% by December.
Despite the oversupply concerns leading to a market selloff, Morgan Stanley's analysis notes a more nuanced picture. Martijn Rats, an MS oil strategist, expects physical recovery of tanker flows to take several weeks. Crucially, the bank still projects an average global oil market deficit of approximately 3.4 million barrels per day in the third quarter, or 1.1 million barrels per day looking at OECD inventories alone. This implies that substantial inventory draws accumulated since the conflict began will need to be rebuilt, providing underlying support for prices. However, high US exports and low Chinese imports, labeled "twin-solvers," are expected to cap the upside for oil prices, preventing a return to conflict-era highs.
The swift return of supply from the Strait of Hormuz has already led to signs of oversupply in global physical oil markets. Middle Eastern crude has been trading in a bearish contango structure since mid-June, and the global Brent benchmark briefly dipped below $75 a barrel. Angolan crude, typically favored by China, has been selling at the biggest discounts in over a decade, at times nearly $10 a barrel below the Dated Brent benchmark. This market weakness highlights the rapid shift from tightness to oversupply, influenced by the accelerated flow of cargoes from the Strait of Hormuz, strategic inventory releases, and reduced demand from China.
Kpler estimates indicate that the reopening of the Hormuz Strait could release some 93 million barrels of previously stranded non-Iranian crude, with an additional 72 million barrels of Iranian cargoes currently held west of Chabahar potentially entering the market. While supply is flooding the market, the need to replenish depleted global inventories, which have been falling at a historic pace, could absorb some of this excess supply, making the system vulnerable to new disruptions if restocking efforts are slow.
