Analysis: Crude Price May Stay High Even With Iran War End


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- Amid the ongoing largest oil supply disruption in history, 
the global supply balance is set for a steep deficit in the first half of 2026, 
laying the ground for potentially high crude prices averaging at above $70 bbl 
through the year.

   Forecasters expected a sizable crude-overhang moving into the year as global 
supply additions were set to continue to outpace demand growth. While this 
phenomenon is likely to be even more pronounced given the impact of persistent 
high oil prices, it is dwarfed by the 12 to 15 million bpd of oil and refined 
product supply cut off from the global market for a month and a half.

   An interim relief to the supply squeeze is expected from diplomatic 
resolutions and an imminent resumption of flows blockaded by Iran on the Strait 
of Hormuz. Iranian Foreign Minister Seyed Abbas Araghchi on Friday declared the 
waterway open to commercial traffic amid a ceasefire on Lebanon by Israel, and 
while Tehran negotiates with the end the U.S. its own close to the Middle East 
conflict. While crude prices tumbled more than 10% on the Hormuz's conditional 
reopen, they remain about 50% higher on the year, and could remain volatile 
pending further negotiations. We estimate an average above $70 bbl for spot 
crude prices over the next few months.

The U.S. Energy Information Administration (EIA) slashed its global production 
forecasts for the first two quarters of the year in its latest monthly outlook 
-- the second time it has done so during the seven-week long war. While the EIA 
sees demand impacted by high prices, revising global demand in Q2 downward by 
800,000 bpd from the previous forecast, it also lowered global production 
expectations by 6.6 million bpd to 99.2 million bpd. This leads to a 5.1 
million bpd deficit in the second quarter and a much smaller-than-expected 
crude overhang in Q1 of just 400,000 bpd. The model assumes oil output to be 
restored partially in the third quarter and fully in the fourth quarter, which, 
averaged over the year, implies a 300,000-bpd deficit.

   The International Energy Agency (IEA), which last year was one of the 
loudest voices warning of record oversupply in 2026 and 2027, made even deeper 
cuts to its demand and supply forecasts in its latest oil market report 
published Tuesday (4/14). The Paris-based energy watchdog now expects 
widespread price-induced demand destruction, leading global oil demand to 
contract by 80,000 bpd this year, compared to previous expectations of a 
640,000-bpd expansion. The agency's global supply growth forecast flipped from 
a 1.1 million bpd expansion to a 1.5 million bpd decline. Despite the steep 
deficit expected for the second quarter and the more than 2 million bpd 
downward adjustment to the global oil balance, the IEA still sees an 
oversupplied oil market this year.

   A quickly enacted series of stop-gap measures was able to soften the blow to 
the global balance. The highest global inventories in five years, coordinated 
emergency stock releases and producers rerouting some oil flows to ports 
outside of the Persian Gulf absorbed a portion of the supply shock. Prolonged 
high prices may negatively impact demand in the short and medium term, 
alleviating part of the current imbalance. At the same time, they could 
incentivize higher output from non-OPEC producers like the United States, which 
recently saw an uptick in well drilling after a prolonged rut.

   This effect, however, won't provide immediate relief given the typical 3- to 
6-month delay between investment decision and extraction of the first barrel. 
Last month, we wrote that "oil prices are likely to stay elevated for long 
enough to justify new wells". The EIA, which only two months ago saw U.S. oil 
production having peaked and expected it to shrink by 2%, last week again 
revised higher its U.S. output forecast, estimating it to expand by 3.2% 
between 2026 and 2027 and to top 14 million bpd by the end of next year.

   Both the EIA and IEA imply prolonged inventory draws and high oil prices 
throughout the year in their forecasts, even if most supply is restored in 
short order. Some supplies may take months to return to pre-war levels or may 
even be permanently lost, given the scale of destruction to energy 
infrastructure in the Middle East, including oil and gas fields and processing 
plants, refineries, pipelines and export terminals. Consequently, the current 
imbalance is likely to outlive the seven-week closure thus far of the Strait of 
Hormuz, until prices take their toll on oil demand and non-OPEC supplies rise 
considerably.

    




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