The oil market has shifted from anticipating supply shortages to worrying about potential surpluses, largely due to a quicker-than-expected recovery in oil supply and existing demand concerns. Brent crude oil futures are trading around $73 a barrel, close to pre-war levels, after peaking at over $126 in April during the Iran conflict. This price collapse is attributed to supply recovering faster than demand, with a growing expectation that the global oil market will be well-supplied through 2027.
Contributing to the improved supply picture is the normalization of tanker traffic through the Strait of Hormuz, where a quarter of global seaborne oil trade occurs. Rystad Energy estimates that roughly 2 million barrels a day of oil production has been restored across the Gulf in the past three weeks, with regional production expected to return to pre-conflict levels by December. Shipments from Saudi Arabia and Kuwait are also recovering, with Saudi Arabia on track for record exports from its Red Sea terminal at Yanbu, and Kuwait lifting force majeure notices. Storage tanks in the Gulf are at 50% to 60% capacity, indicating a limited buffer for producers if tanker traffic faces further disruptions.
Despite the improved supply, lingering security risks in the Strait of Hormuz, such as the possibility of sea mines and elevated war-risk insurance premiums, continue to pose challenges. Many shipping companies remain reluctant to send vessels through the strait due and insurance costs are high, with insurers awaiting months of sustained stability before significantly reducing premiums. Analysts also believe that rebuilding global inventories could support oil prices over the coming months, with importers worldwide expected to rebuild strategic reserves, creating demand that could absorb increased production.
Wall Street firms have revised their oil forecasts downwards. Goldman Sachs cut its fourth-quarter 2026 Brent forecast from $90 to $80 a barrel and its 2027 average forecast from $80 to $75 a barrel. Morgan Stanley lowered its Brent outlook from $85 to $80 a barrel through 2027, and JPMorgan expects Brent to average $80 a barrel in the fourth quarter, declining to $64 in 2027. ING's head of commodities strategy, Warren Patterson, noted that oil near $70 a barrel has "close to zero geopolitical risk premium" priced in, with expectations of a 2027 surplus weighing on sentiment.
