Citi Says Oil May Slump to $60 as the Hormuz Shock Fades Away

Citi has significantly revised its Brent crude oil price forecasts downward, with the bank now expecting prices to drop by $10 to $15 per barrel if the market fully prices in the normalized trade flows through the Strait of Hormuz. The bank sees a 60% probability of normalized Hormuz trade flows by mid to late July, following a US-Iran breakthrough agreement. This shift turns oil from an inflation shock risk into a potential disinflation catalyst for investors.

Specifically, Citi slashed its Brent crude forecast for Q3 2026 to $75 a barrel, and for Q4 2026 to $70 a barrel. This represents a $20 cut for Q3 and a $10 cut for Q4 compared to previous forecasts. For 2027, the bank's longer-term view is near $65 per barrel. These revisions are a direct result of the perceived lowering of risk for lasting disruptions in the Strait of Hormuz, a critical chokepoint through which about 20 million barrels per day moved in 2024.

The revised outlook comes after Citi had previously raised its base-case forecast to $110 for Q2 2026, $95 for Q3 2026, and $80 for Q4 2026, assuming longer disruptions in the Strait of Hormuz. The current move by Citi reflects an immediate removal of the "war premium" from oil prices, as the market is expected to return to supply-and-demand fundamentals rather than trading on geopolitical fears. This softer setup is crucial for investors as lower Brent prices are anticipated to cool inflationary pressures, including gasoline and transport costs.

The agreement between the US and Iran, described as an MoU (Memorandum of Understanding), is seen as the catalyst for these changes. Analysts at Citi believe that while the market is pricing in the MoU, it has not yet fully accounted for a sustained agreement securing Strait of Hormuz flows over the medium term, which would further push crude oil prices down by approximately $10-$15 per barrel. However, some market observers remain cautious, noting that key issues in the MoU remain unresolved and a US sanctions relief expiry on August 21 poses a potential risk if the agreement is not maintained.