Oil traders remained true to their recent selves. They reacted to a smorgasbord of headlines, driving prices to highs not seen in two weeks and resulting in a rather impressive recovery of nearly $12/bbl from low to high over five days, basis Brent.

Ships are not passing through the Strait of Hormuz, or at least their numbers are dwindling. Shipping sources, as reported by Reuters, estimate that a mere six vessels sailed through this chokepoint, compared with a 10-day average of 11. The Houthis remain disturbingly active in the Red Sea, with the latest atrocity involving attacks on a cargo ship and a Saudi vessel by the Iran-aligned Yemeni group. To make matters worse, Libya’s largest operating refinery could be forced to declare force majeure due to drone strikes, while Ukraine launched another successful attack on a Russian refinery.

The intraday wobble—a more than $3/bbl drop—was precipitated by vague comments from Pakistan about “some sort of deal” between the US and Iran, while Qatar also showed its optimistic face by reporting progress in talks between Oman and Iran. Although the API recorded a huge rise in crude oil stocks, products, the ultimate arbiter of the health of the oil market, kept drawing.

 
Stock Draws This Year, Replenishment Next

In the last six months, it has always been the current snapshot that has mattered. Of course, the picture that forecasting agencies have been presenting us with is changing, sometimes rather drastically, with hopes and expectations. In turn, these perceptions are shaped by the number of ships transiting the Strait of Hormuz or the Bab el-Mandeb waterway, by the belief that tolls will be collected from ships, by actual or imaginary agreements, intense or low-key negotiations or, quite frequently, by a single social media post—or a barrage of them.

You get the picture. Predicting the future oil balance in an unpredictable environment is tricky. This is what forecasters are having to deal with. The source and quality of the information they are forced to rely on are dubious and inconsistent. Yet, in an ambiguous geopolitical and geoeconomic climate, these are the ingredients they have to work with to serve us a palatable menu.

It is that time of the month again, when the three major agencies take stock of the changes in the global oil balance over the preceding four weeks. And changes did occur. The memorandum between Iran and the US is a distant memory; nonetheless, talks between Iran and Oman, the guardians of the Strait of Hormuz, have intensified, and an agreement is reportedly close. Naturally, it will come with very thick strings attached, namely money. Both Iran and the US demand, among other conditions, that reparations be paid for the harm, damage and distress mutually caused over the better part of the year.

So, how does this translate into the language of global oil supply and demand in the EIA’s view? (OPEC and the IEA will publish their versions of the outlook later today.) The sub-headline is a spoiler. This year, the statistical arm of the Department of Energy concluded, will be awfully tight, with global and regional oil inventories falling to historic lows. In 2027, with an excusable exaggeration and borrowing the words of an oil major’s CEO from 2016, swimming pools might be needed to hold the excess.

The EIA anticipates a massive supply deficit in 3Q (3.84 mbpd) and a mild one in 4Q 2026 (630,000 bpd). This would result in OECD commercial oil inventories falling to 2.527 billion bbls and 2.477 billion bbls, respectively. This is the product of severely impeded OPEC+ (the EIA really means Persian Gulf) oil production, although the worst is ostensibly behind us. In 2Q, production from the region hit 31.15 mbpd, which should climb to 33.13 mbpd in the current quarter and to 35.85 mbpd in the October–December period. Yet, the end-2026 stock prognosis probably entails $100+ prices.

The recovery in OPEC+ output continues throughout 2027, by the end of which it will have climbed to 40.12 mbpd. This year’s global supply deficit turns into a surplus; global oil stocks swell each quarter, on average by 4.78 mbpd, and OECD inventories jump to 2.905 billion bbls by the end of 2027. (In 2016, the same figure was much higher, at 3.057 billion, so, OK, maybe swimming pools won’t be needed to store oil, but the surplus is still substantial.)

The ultimate objective for an oil trader is to derive a price from the forecast. Based on these figures, and on the assumption that the Middle East supply disruption will last longer than deemed likely in July, Brent will average $87/bbl in 2026 and $69/bbl in 2027. The protracted constraints on Middle East oil supply and exports are reflected in the monthly upward price revisions, which were $5/bbl for this year and $4/bbl for 2027.

To round up the updated findings from the EIA, there are two points well worth making. First, as mentioned above, the views are, rightly, based on assumptions. If the Strait opens sooner than expected or remains inoperative for longer than is currently believed, significant corrections will be forthcoming next month. Second, the relatively gloomy price forecast for 2027 might be questionable. If the flow of oil out of the Middle East does pick up considerably, it will be used, as envisaged in the EIA report, to replenish depleted stocks—both industrial and strategic. Should this be taken as a sign of extra demand, actually supporting oil prices?

The mind does, indeed, wander, but only time will tell who is right.

Overnight Pricing