Wall Street banks are significantly revising down their oil price forecasts for the coming quarters and years. Morgan Stanley, for instance, has lowered its Brent crude outlook from $85 to $80 per barrel for Q4 2026 through 2027. JPMorgan also anticipates Brent to average $80 per barrel in Q4 2026, further declining to an average of $64 in 2027. Goldman Sachs, earlier this month, cut its Q4 2026 Brent forecast from $90 to $80 per barrel and reduced its 2027 average forecast from $80 to $75 per barrel.
This shift in outlook is primarily driven by the oil market transitioning from concerns about supply shortages to worries about an impending surplus. International Brent crude futures were trading around $73 a barrel early on Tuesday, a significant drop from peaks of over $126 in April. This price collapse is attributed to a faster-than-expected recovery in supply, particularly from the Middle East following an interim deal to reopen the Strait of Hormuz, where roughly a quarter of global seaborne oil trade passes. Rystad Energy estimated about 2 million barrels a day of oil production had been restored across the Gulf in the past three weeks.
Adding to supply recovery, the prospect of an Iran-US diplomatic agreement is diminishing the geopolitical risk premium previously priced into oil. Rystad Energy also noted that Gulf storage tanks are 50% to 60% full, offering limited buffer if tanker traffic through Hormuz does not normalize swiftly. However, the Strait of Hormuz remains a key uncertainty, as demonstrated by recent incidents involving Iranian forces and a Taiwanese cargo vessel, though traffic quickly resumed afterwards.
Simultaneously, weaker global demand, particularly from China and parts of Europe, is exacerbating the oversupply concerns. Goldman Sachs highlighted that softer fuel consumption in China and the long-term risk from electric vehicles are major downside risks for crude. Morgan Stanley's latest revision for Brent crude to an average of $75 per barrel for both Q3 and Q4 2026, and to around $70 per barrel by the end of 2027, reflects these combined factors of rising supply and weaker consumption, increasing the risk of a global oil surplus.
Market sentiment currently anticipates a well-supplied global oil market through 2027, with ING's head of commodities strategy, Warren Patterson, noting that oil near $70 a barrel has "close to zero geopolitical risk premium" priced in. The International Energy Agency (IEA) forecasts a potential surplus of roughly 5 million barrels per day in 2027, as global supply is expected to rebound by about 8 million barrels per day to roughly 110.3 million barrels per day, while demand recovers more modestly. Investors are pricing in hopes for a positive outcome from potential US-Iran talks in Doha, further contributing to a bearish outlook.
