President Trump has had his fair share of criticism for his outlandish and often unsubstantiated comments and worldview, but he accurately predicted that oil prices would drop like a stone well before the ink dried on the extended ceasefire agreement. It appears that the conditional reopening of the Strait of Hormuz—through which 12.5 million bbls of oil had already transited yesterday, according to the US Vice President (Reuters has tracked only 6 million bbls of that volume)—along with the lifting of force majeure declarations by Kuwait and the end of the US naval blockade, convinced investors that the disruption which had propelled prices above $120/bbl is well and truly over.

Although oil prices spent most of yesterday in the red for the fifth time in the past six sessions, the late rally may serve as a reminder that the recovery is unlikely to be smooth sailing—literally. Oil inventories continue to decline; crude oil stocks at Cushing, Oklahoma, have fallen to their lowest level in 12 years, which could make for an eventful WTI expiry on Monday. Meanwhile, two Asian oil companies have reportedly failed to secure cargoes of Iraqi crude for loading (Reuters). Shipping and insurance companies remain publicly pessimistic about a swift return to pre-crisis conditions, and the financialization of futures markets means that sharp selloffs and rallies alike tend to overshoot.

The 60-day truce is an unambiguously welcome step in the right direction. However, even if the agreement holds, the recent sell-off may prove unsustainable in the short term.
 

Reality is a Fluid Concept

Sometimes it is useful, and even obligatory, to be philosophical. According to the public intellectual Yuval Noah Harari, the world operates across three distinct layers of reality: objective reality (gravity, a round Earth, vaccines, collectively known as science, although some would happily deny it), subjective reality (pain, dreams, love), and intersubjective reality, which encompasses everything in between: stories, fiction, myths, and concepts, things that exist, albeit not permanently, in the collective minds of groups of people. A great example of the latter is the Soviet Union or Yugoslavia, both of which existed only because enough people believed in them. When that belief disappeared, so did those countries.

Humans rule the world (until machines take over) because of their willingness and ability to cooperate with strangers. This capacity has been brutally apparent over the last three to four months in financial markets, including oil. The consensus at the beginning of 2026 was one of solid economic growth, subdued inflation, and an oversupplied oil market. That belief changed radically when the Iranian conflict broke out at the end of February, and the Strait of Hormuz was closed. Enough people came to believe in a tighter oil balance and, therefore, higher oil prices and rising inflation.

That belief began to evaporate at the end of April for well-publicised reasons: alternative transport routes, coordinated SPR releases, demand destruction, and so on. A sufficient number of market participants believed that these forces would become the dominant drivers of oil prices. This group of individuals (and, rather frighteningly, machines), clearly the majority, felt even more emboldened at the end of last week, when an extension of the ceasefire between the US and Iran appeared more realistic than ever.

Selling intensified. Brent dropped by more than $18/bbl, or 20%, in the space of a week. Why? Because of the conviction that increasing oil availability will push the market into surplus. The antagonist, who argues that this surplus will first require the replacement of well over one billion lost barrels and that market tightness will therefore persist, has been left badly, though perhaps not fatally, wounded.

Nonetheless, the prevailing view of oversupply, or at least a considerably looser oil balance, permeates forecasts for 2027, as evidenced by the updated reports from OPEC and the International Energy Agency. When comparing the two sets of projections for next year, some groundwork is required to bring them to a common denominator. OPEC still appears to include the UAE in the OPEC+ (or DoC) category, while the IEA does not, hence the sharp divergence in the call on DoC crude. This difference can largely be reconciled by assuming vastly deviating DoC production levels for next year.

It is, once again, conspicuous that aftercasting is much more of a science, whereas forecasting requires a healthy dose of art. For last year, the difference in estimated OECD oil inventories was a mere 13 million barrels; for end-2026, that gap widens to roughly 400 million barrels. (It is imperative to point out that this chasm may also reflect the fact that OPEC released its findings before, and the IEA after, the announcement of the extended ceasefire agreement.)

The gap widens even further in 2027. Both reports foresee growth in global oil demand as well as non-OPEC+ supply. The IEA, however, expects non-DoC supply to expand faster than consumption, whereas OPEC takes the opposite view: demand growth will outpace non-OPEC+ supply growth by more than 1 mbpd. On balance, global oil inventories would increase by only 250,000 bpd under OPEC's outlook (assuming, somewhat arbitrarily, OPEC+ production of 43.75 mbpd in 2027, including the UAE), whereas the IEA expects global oil stocks to build at a rate of 5 mbpd.

The reasons behind the ostensibly looser oil balance are numerous. The Strait will reopen, with the UAE having left OPEC, its production is expected to receive a meaningful boost, and non-OPEC+ producers such as Brazil, Guyana, and the United States will provide a robust supply backdrop. On the demand side of the coin, heightened concerns about energy security are expected to accelerate the transition from fossil fuels to renewables once again. Consequently, demand growth is likely to lag production growth. (OPEC would respectfully disagree.)

Contemporary research and forecasting remain contingent on developments in the Middle East. Current projections are based on the assumption of a prolonged ceasefire and relatively uninterrupted oil flows. We are not suggesting that this fragile and peculiar armistice will break down, although such a possibility cannot be ruled out. We, nevertheless, remain in the minority when it comes to the sustainability of the current downward price move. Admittedly, more investors need to subscribe to our view to be proven correct. However, we expect supply to grow faster than demand in 2027. The outlook is ambiguous, and if we may conclude this bout of verbal diarrhoea with a meaningless piece of advice: you are more likely to be a winner if you pick the larger herd. After all, we live in an intersubjective reality. Or, in other words, chaos.

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