Oil off its highs but risks return
As oil prices experience downward pressure following the US-Iran agreement, this piece highlights the complexities and risks surrounding future supply recovery. Per the full note from ing-think, the deal allowed for an unexpected swift recovery of oil flows from the Persian Gulf; however, this has not fully normalized, and any escalation in US-Iran tensions could rapidly alter the outlook. Additionally, the demand recovery is lagging behind supply, with estimates indicating that Brent will average $80/bbl in Q3 2026. This suggests a market balance may remain precarious, with any geopolitical developments likely to sway prices significantly.
What the desk is arguing
The desk posits that recent geopolitical developments create a shifting landscape for oil prices, which could see volatility return. As outlined in the ing-think report, the normalcy of oil flows from the Persian Gulf is hindered by ongoing military tensions, which complicates demand recovery.
Supply is currently strong, with flows around 14m b/d, but well below pre-war levels of 20m b/d. This stark disparity reflects the frail recovery of demand, reinforcing the view that Brent will see an average drop to $74/bbl in Q4 2026 at the earliest.
Where it sits in our coverage
While there's no specific internal coverage data for currency pairs, our general outlook on oil prices aligns with broader industry perspectives. Firms like jpmorgan are predicting Brent closer to $80/bbl, while bofa holds a more conservative estimate around $74/bbl for later in 2026.
How other firms see it
Many firms are aligning with the bearish outlook, suggesting that a continued risk of geopolitical tensions could keep oil prices subdued. However, some firms maintain a bullish stance, anticipating stronger demand as China's buying patterns may eventually rebound. jpmorgan and bofa are notable mentions within this discourse.
Relevant factors to monitor include the ongoing dynamics of US-Iran relations and the demand trajectory from China, as these will significantly affect oil markets moving forward.
Key takeaways
- 01Recent US-Iran deal has pressured oil prices but risks remain high due to ongoing tensions.
- 02Brent is expected to average $80/bbl in Q3 2026 and drop to $74/bbl in Q4 2026.
- 03Supply recovery from the Persian Gulf is not yet fully normalized, impacting the physical oil market.
- 04Geopolitical developments will likely determine short-term volatility in oil pricing.
Market implications
Traders should keep an eye on Brent oil futures, particularly if prices approach the $80/bbl mark again. Additionally, any further escalation in US-Iran tensions could lead to swift market reactions, altering the current supply-demand landscape significantly.
Risks to this view
A re-escalation of military tensions between the US and Iran could dramatically alter the oil price outlook, pushing prices higher if supplies are disrupted. Furthermore, faster-than-anticipated recovery in Chinese demand could lead to a tighter market and upward pressure on prices.
Articles Oil off its highs but risks return Published 11:10 Commodities, Food & Agri Energy Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Oil prices came under significant pressure following the temporary deal between the US and Iran. But the recent flare-up in hostilities poses risks. The key factors for the outlook remain the sustainability of the Persian Gulf supply recovery and how soon Chinese buying returns to the market Warren Patterson We're now expecting Brent to average $80/bbl in 3Q26 and $74/bbl in 4Q26 Oil supply recovery clashes with weak Chinese buying The oil market came under significant pressure following the Memorandum of Understanding between the US and Iran on 17 June.
The deal allowed oil flows to recover at a much quicker pace than expected, which led to a weakening in the physical oil market. The return of Persian Gulf supply coincided with the continued release of oil from strategic reserves, along with demand recovering at a relatively slower pace than supply. However, it is important to note that flows have not fully normalised.
And, the latest escalation in US–Iran military tensions this week raises new risks. Vessels transiting the Strait of Hormuz remain well below pre-war levels. And recent developments show that safe passage of vessels is still an issue facing the market.
When volumes bypassing the Strait are taken into account, oil flows have been in the region of 14m b/d – still far below the pre-war levels of 20m b/d, but up significantly from the levels seen during the peak of the war. We had originally anticipated that the normalisation of oil flows from the Persian Gulf would take much of the third quarter; it is possible that this normalisation could be achieved by the end of July. However, this is a very fluid situation, and this can certainly change depending on how recent events unfold.
The quicker ramp-up has led us to revise our ICE Brent forecast lower for the remainder of the year. We're now expecting Brent to average $80/bbl in 3Q26 and $74/bbl in 4Q26. Meanwhile, for 2027, we forecast Brent to average $70/bbl.
The key assumption behind these forecasts has been that there would be no further meaningful disruptions to flows through the Strait of Hormuz. This may be too optimistic, given the recent re-escalation. And in reality, we could see the market trading between our base case and our more aggressive scenario, where Brent tests $100/bbl in the third quarter.
Our balance sheet still shows the market in a slight deficit in the third quarter of this year, before returning to a surplus in the fourth quarter and then a meaningful surplus in 2027. As a result, we do expect the market to find some support in the near term, once we have cleared the overhang of tankers that have been stranded in the Persian Gulf. Clearly, risks around the broader ceasefire should also offer some support.
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