Nothing is straightforward, and even Franz Kafka could not have written a more grotesque novel. Yet, it seems increasingly plausible that the conflict that upended the global economy and the oil balance is slowly drawing to an eagerly awaited end. That much was reflected in last week's price action and the overnight sell-off, as the warring parties are expected to sign an agreement on Friday to reopen the Strait of Hormuz. The two major crude oil benchmarks, WTI and Brent, both lost almost $6/bbl over the week, while front-month backwardation narrowed by $1/bbl. Another $4 was shed from outright prices this morning.

The pre-crisis status quo may never be fully restored, or at least not for a long time, but the most pressing issue, the resumption of oil and other commodity flows, appears likely to be resolved in the foreseeable future. A truce has been reached between the US and Iran. However, Israeli strikes on Beirut over the weekend clearly demonstrate that the road to a stable and lasting agreement will be paved with twists, turns, and setbacks.

But first things first. The immediate objective is to extend the two-week ceasefire agreed on April 8 by a further 60 days. During this period, according to the Memorandum of Understanding, the Strait of Hormuz would reopen, and Iranian forces would be responsible for clearing it of mines for the first 30 days. No tolls would be charged to vessels during the 60-day period, and the US would lift its naval blockade of Iran, effectively allowing the Persian Gulf nation to export its most important source of revenue.

In return, Iran would refrain from procuring or developing nuclear weapons. Iranian assets held abroad would be unfrozen, but this, along with other sanctions relief, would be phased in and made contingent upon the success of the ongoing negotiations, the most important aspect of which concerns Iran's nuclear programme. The disposal of 9,000 kg of enriched uranium would also need to be resolved. One proposal, the minimum acceptable requirement, would be to dilute it on-site under the supervision of the International Atomic Energy Agency. The fate of the 440 kg of weapons-grade uranium is likely to prove particularly contentious.

It is difficult to see Iran relinquishing what it considers its right to enrich uranium, which it claims is intended for peaceful civilian purposes. Another stumbling block will be Israel's belligerence towards Hezbollah in Lebanon. Iran will insist that any agreement must include the cessation of hostilities against Hezbollah, while the Israeli Prime Minister will, in all likelihood, continue military operations against the Iranian proxy ahead of the upcoming election.

Nonetheless, over the past three and a half months, the chances of ending the conflict have never been higher than they are today. The truce would go a long way towards breathing life back into the oil market, which has been in a state of paralysis of late as fatigue has set in and investors have become increasingly reluctant to participate. Average daily trading volume in Brent, which has fallen significantly from the levels seen in March and April and even compared with the first two months of the year, should recover, providing much-needed liquidity. Open interest should also increase. Net speculative length, which plunged to its second-lowest level of the year last week, is likewise likely to rise as money managers seriously contemplate returning to the market. The end of a war that has proven to be an unmitigated disaster and a grave miscalculation cannot come soon enough, but the negotiations are likely to prove painfully slow.
 

Supply Disruption still Exceeds that of Demand

The possible burying of the hatchet in the Persian Gulf prevented us from commenting on OPEC’s latest monthly report on Friday. We make amends below. The Iran-US/Israel stand-off has been the most consequential geopolitical upheaval of recent times; therefore, digesting the weekend’s developments understandably takes precedence in both time and space. Yet the organisation’s view of the oil balance also carries undeniable significance. A healthy compromise is to touch upon Thursday’s Monthly Oil Market Report in a condensed form.

Given that the updated report was released before the US announcement of a potential deal with Iran, it is not an utter shock that its tone stands in stark contrast to the prevailing market sentiment. Agreement or fallout, truce or escalation, the figures will be amended and adjusted to the new reality within a month; however, last week’s findings from the producer group paint a picture of an immensely tight market.

Elevated oil prices have resulted in a further downward revision to global oil demand growth for 2026, although the producer alliance expects the impact of the Iranian conflict to be less damaging than the EIA does. Global consumption is now expected to grow by 930,000 bpd in 2026, down from 1.15 mbpd in May. The EIA, by contrast, envisages growth of 1.1 mbpd. In absolute terms, this year’s demand forecast has been downgraded by 220,000 bpd, compared with a 1.3 mbpd forecast from the EIA. The cut for the second half of this year stood at 150,000 bpd.

Non-DoC supply estimates remained unchanged, so the call on DoC oil was lowered by the same amount as demand. Assuming DoC production of 33.70 mbpd in 2Q (still including UAE output figures), global stocks would draw by 7.3 mbpd in 2Q, as the call is seen at 41 mbpd. Demand for DoC oil is projected to rise to 42.9 mbpd in 3Q and 43.3 mbpd in 4Q. Of course, DoC production is widely anticipated to increase faster than demand for DoC oil; yet, if we assume second-half output of 40 mbpd from the group, global oil inventories would still decline by as much as 3 mbpd in the latter half of the year. The cumulative global drawdown from 2Q to 4Q is therefore projected at 4.4 mbpd.

It is far from a dream scenario for oil bears, but it might not matter. They have generously overlooked forecasts over the past three months, and if traffic through the Strait really starts flowing freely again, the upside will be very limited. And this is the script that is particularly difficult to reconcile based on the latest findings.

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