It is best to cite the weekly closing prices as an overture to this note. The changes speak volumes, but at this point, it is not entirely clear what they are telling us. The differences between crude oil and product prices are somewhat perplexing. Both WTI and Brent fell by around 10% last week. The front-month Brent spread has performed a handbrake turn, diving from a backwardation of more than 50 cents/bbl to a contango of 61 cents/bbl week on week. This spectacular change of heart was naturally accompanied by pronounced weakness in Brent CFDs, with next week's Dated Brent now valued at more than $1/bbl below the forward contract, representing a weekly decline of 90 cents/bbl. These figures unequivocally point to sluggish physical and financial demand for oil, alongside more than ample physical and financial supply.

Price movements in refined products stood in stark contrast to those of the two major crude oil futures contracts. The weekly losses of 1.26% in RBOB and 2.62% in Gasoil pale in comparison with those in crude oil, while the 2.59% weekly gain in Heating Oil, partly aided by the current heat wave and Russia’s refinery difficulties, makes the outlook even more ambiguous. You will have noted that the comparatively encouraging performance of refined products, with crack spreads at levels not seen for a month, came amid weekly stock builds in the US, NWE and Singapore, and you will rightly ask what on earth is going on.

One possible answer, among many, is that there is a wide gap between those who predict oil prices and those who shape them; between analysts and researchers, on the one hand, and market players, on the other. With some exaggeration, the first group might be labelled what economists call Homo Economicus. He possesses perfect rationality; his decisions are logical and free from cognitive biases, impulsive urges and external pressures. This group expects continuous global stock draws throughout the year despite the tentative and fragile ceasefire in the Persian Gulf. We have commented in recent weeks on the latest findings of the three main forecasters, who broadly share this view. Energy Intelligence joins this cohort, forecasting a 4.2 mbpd supply deficit in the third quarter. Although this could turn into a surplus of 3.3 mbpd during the final quarter of 2026, the annual average stock depletion is projected at 3.15 mbpd, followed by an increase of 4.25 mbpd in 2027.

Of course, there are still numerous moving parts in this equation that could significantly alter the oil balance. Yet the other group of market participants has, so far, remained confident that even if stock depletion continues in the foreseeable future, its impact will be marginal. This group, undeniably the dominant driving force, is influenced, as behavioural economics suggests, by psychological and emotional factors—what traders might call FOMO, herd mentality or the financialisation of markets. They believe that the conflict, which pushed the price of Brent above $120/bbl in April, will not escalate, and that the ceasefire, despite inevitable but temporary setbacks, will evolve into a lasting peace. It is more than just an adrenaline shot; it is perceived as a long-term, reliable and effective remedy that will prevent a repeat of the chaos experienced in March and April.

It would be foolish to argue against this view in light of the oil market's performance over the past month. The question, however rhetorical, must nevertheless be asked: what could force these eternal optimists to change their minds? To begin with, a breakdown of the ceasefire. There are two critical elements to consider. First, it must be remembered that the current period of relative calm is part of a 60-day armistice (with 47 days remaining), during which nuclear negotiations are expected to conclude. The timeline is clearly closer to daydreaming than to reality. We cannot help but think that the parties' objectives regarding the denuclearisation of Iran remain so far apart that they provide fertile ground for renewed animosity, which could adversely affect the smooth resumption of oil flows through the Strait. Secondly, Iran will undoubtedly link the success of the negotiations to the establishment of a free Palestinian state, while the conflict with Israel is unlikely to abate before the Israeli elections at the end of October. The repercussions could include periodic closures of the Strait, renewed attacks on oil infrastructure in the region and, ultimately, delays to stock builds. A peek preview was provided last week. After Iranian strikes on a Singapore-flagged container ship and a Panamanian oil cargo, reciprocal attacks on Iranian air defence sites, communication systems, and on US army bases in Kuwait and Bahrain, oil spiked early today, only to retreat as the parties have reportedly agreed to halt hostilities and resume talks. Healthy refining margins referred to above might well be the harbinger of such an apparent mood shift.

It is intriguing to note that the first group has already shown intellectual flexibility by revising its assessment of the future impact of the Middle East conflict. This has taken the form of reassessing future oil price forecasts. Looking at the latest projections from the major investment banks, every revision has been a downgrade. That is hardly surprising. Ongoing peace talks and the increase in available oil supply inevitably had to be incorporated into their models. What is curious, however, is that these revised price forecasts remain significantly above both the current spot price and the futures curve. Take Barclays' latest projection, published last Friday, well after the reopening of the Strait. The bank lowered its 2026 Brent price forecast from $100/bbl to $96/bbl. Even so, this remains well above both the year-to-date average of $87.83/bbl and the second-half 2026 futures curve of approximately $73/bbl. For 2027, the bank reduced its forecast by $3/bbl, from $88/bbl to $85/bbl, which likewise remains comfortably above next year's futures curve of around $72/bbl. It appears that something will eventually have to course-correct: the current price trend or the oil balance forecasts; Homo sapiens or Homo Economicus.

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