An extraordinary turn of events now unfolds in the Middle East. The concealed frustration and antagonism between those supposedly adhering to the memorandum of understanding, finally found its way into military expression. We discuss below how predictions are assumptive, but this deterioration in diplomacy and acceleration in weapons exchange has caught the market a little on the hop. The last two-weeks’ worth of attacks, our fraternity presumed, have been reminders by the US of what might happen if an agreement is not reached, and vice versa, from Iran how they will respond. However, this seems beyond any military nudge and the market is beginning to suspect we are crossing the line in brinkmanship. It cannot be just coincidence that the Houthi’s in Yemen have chosen this time to renew attacks on Saudi, which of course is returned in kind; Iran is presenting how it is still able to express war through proxies beyond the Hormuz focus. Sullying the whole sorry affair is the new proposed Trump tariff. If one could hear a gasp through electronic trading and media, then yesterday would have served up such an exhalation when the US President declared the US the “guardian of the Hormuz Strait” and protection provided by US military will require a fee of 20 percent of the value of cargoes convoyed. Trump also reinstated the Iranian blockade, the Iranians hit 2 UAE tankers, and the morass conceals how open the waterways of Hormuz actually are. The oil fraternity has rightly elevated oil price across the board as this is no time to practice the undoubted skills of being short.

Higher, lower, adjust

If you want to ask an impossible question, enquire on where the price of Brent will be in 6 months or a year’s time. Anything other than an immediate response of ‘I do not know’ from your interrogee will reveal a real crapshooter or being unkind, delusion. Last month saw an incredible spate of readjustment on the price of future Brent calls from various sources including some of the largest Wall Street banks, who before the ceasefire and the outbreak of the memorandum of understanding, were not shy in warning on $120/barrel and beyond. Subsequently, in the middle of June, Goldman Sachs called the North Sea benchmark to average $85 this year after trimming a previous call of $90/barrel. Morgan Stanley culled a dated Brent call of $100/barrel in the fourth quarter to be replaced by one of $90. It would be lazy and easy to poke fun at the shifting predictions, we too have not been immune to being wrong, with the point being that if daily and weekly circumstances of the Iranian war change, then any models based around assumptions must bring about fluidity in opinion. 

Even one of the paragons of oil price reporting and analysis is not beyond experiencing changes of heart. Indeed, one of its subtitles in last week’s IEA Oil Market Report headed an outline of variable outcomes as ‘Not Strait Forward’. A wisely chosen homonym because even the International Energy Agency opted to be subjective rather than definitive as it too tried to make sense of impossible headlines and oil data that has a sell-by-date akin to the cheap charcuterie being offered on a supermarket cold shelf with a chiller having stopped working yesterday. Looking into the future, as described on Reuters, the IEA predicts supply will expand by 7.5mbpd next year after a 3.7mbpd contraction this year, but that is allowing for improved Hormuz transits.

Contingency itself is a many-splendid thing when dealing with a geopolitical situation such as this. The person inventing an A.I. tracker able to absorb the whimsies of a frustrated American President and the belligerent, existential-fearing Iranian regime, would we suggest, be the next trillionaire. As it is, the IEA can only report on the myriad and competing data it has in front of it and try to mould them into a plausible argument. Global oil supply rebounded by a sharp 4.1mbd to 98.8mbd in June, as a resumption of flows through the Strait of Hormuz underpinned a partial recovery in Gulf production. World output was nevertheless some 9.4mbd below pre-war levels, with supply on track to decline by an average of 3.7mbd to 102.6mbd in 2026, contingent on a swift de-escalation of renewed hostilities. There is the ‘contingent’ word again, in all its honesty. 

Where there is more assuredness, is in how the IEA sees oil stocks. Although onshore tanks saw declining levels, global oil inventories rose by 21mb in June, the first increase seen in four months. Still, OECD stocks fell by 62mb in June, likely still feeling the outflows from SPR releases headed up by the IEA itself. It notes a cumulative 360-million-barrel draw in stocks over the March to May period. Even though the report envisages a demand drop of 1mbpd for calendar 2026, next year will see growth of 2mbpd which once again highlights the problems the world is facing with such low oil inventories. This is brought sharply into mind by an analytical piece on Reuters yesterday and follows on from the real problems in products discussed in yesterday’s note. Jet Fuel inventories in Europe stand at 38mb, according to Energy Aspects, which leads Reuters to calculate the old continent having only 30 days of demand cover. 

The frequency in which analysts call upon tolerance from their audiences in their oil price calls can only increase as the uncertainty in the Middle East grows. The world does not truly know whether Hormuz is open or closed for business, which leads to so many variables in possible outcomes to oil price predictions in the future as to be worthless. We are in a here and now market, and until as at such time this almost idiotic conflict is over, our eyes and ears should become used to price propositions that are as valid as long as their ink is still wet or words heard still warm on the breath. Whether one wants to take a stab at where the USD might next go, or whether by the end of the year the US Federal Reserve will need hike interest rates, is bound directly to the fortune of the oil price, which is no longer just bound to Hormuz, but additionally to the undiagnosable diplomatic words that surround it.

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