We have revised our oil price forecasts higher as peace talks between the US and Iran stall, and with no immediate signs of a resumption in flows through the Strait of Hormuz.
Eight weeks have now passed since US and Israeli strikes on Iran. This led to the ongoing blockade of the Strait of Hormuz, a key chokepoint for the global oil market with roughly 20m b/d of oil moving through the strait prior to the war.
After considering the diversion of some oil via pipelines and the trickle of tankers still making it through the Strait of Hormuz, around 14m b/d of oil supply is currently disrupted. Over the first 2 months of the conflict, around 850m barrels of supply have been lost. Clearly, the disruption grows every day that passes without a resolution.
While Iranian oil had been moving through the Strait of Hormuz largely unaffected, the US blockade poses some risk to these flows. Prior to the blockade, we were estimating Iranian oil exports of around 1.5m b/d.
In our base case, we initially assumed that we would start to see a gradual resumption of flows through the Strait of Hormuz in April. However, this has clearly not materialized. Therefore, we are updating our base case assumptions and, as a result, revising our ICE Brent forecasts higher.
We are now assuming that oil flows through the Strait of Hormuz will slowly start resuming in May and June, and remain below pre-war levels for most of the year. This longer return allows for the gradual resumption of upstream production, which has had to shut in due to storage constraints. It also allows for potential infrastructure damage, which could further slow the return to pre-war levels.
Our new base case sees ICE Brent averaging $104/bbl ($96 previously) over 2Q26, while the significant inventory drawdown and slow recovery towards pre-war flows see Brent averaging $92/bbl ($88/bbl previously) over 4Q26.
Low inventories and the need to restock, whether commercial or strategic reserves, also suggest that oil prices will remain relatively well supported for the foreseeable future.
The upside risks to this assumption are a near full closure of the Strait of Hormuz persisting through May, which would likely see Brent finding a floor above $100/bbl for the remainder of the year. This is aligned with our scenario 2. However, a more significant risk lies in a renewed escalation that could nearly halt oil supply through the end of the second quarter. Under this scenario, Saudi crude shipments via the Red Sea and UAE exports from Fujairah would also be disrupted, potentially driving oil prices to new record highs.
This is aligned with our more aggressive scenario 3.
There has been considerable debate over whether current oil prices fully reflect the severity of the supply disruption, with many arguing that prices must rise further to trigger sufficient demand destruction and restore market balance. However, it's important not just to look at crude oil prices. The surge in product cracks means that refined product prices have seen significantly more strength and will be driving demand destruction already. While Brent futures are up around 80% so far this year, gasoil and jet fuel prices are up 102% and 120%, respectively.
Between flight cancellations, reduced run rates at petrochemical plants and measures taken (particularly in Asia) to reduce energy consumption, we estimate demand destruction in the region of 1.6m b/d. While this is meaningful, it would be insufficient if supply disruptions persist. Under a prolonged disruption scenario (scenario 3), substantially higher oil prices -- across both crude and refined products -- would still be required to drive additional demand destruction.