Peace or Not, Cheap US$60 Oil Is a Distant Memory
Global oil prices have fallen after the United States and Iran announced a memorandum of understanding paving the way for a cessation of conflict and the reopening of the Strait of Hormuz. However, the decline has not altered the outlook of many energy analysts. Oil prices are expected to remain elevated for several months, even if a peace deal is fully realised.
On Tuesday, Brent crude futures fell 5.06% to close at US$78.96 per barrel, while West Texas Intermediate dropped 5.82% to US$76.05 per barrel. This marked the first close below US$80 for both contracts since early March. On Wednesday, Brent eased a further 0.4% to US$78.64 and WTI weakened 0.7% to US$75.53.
According to The Economist, energy markets initially welcomed the news because the Strait of Hormuz is a vital artery for global energy trade. Roughly one-fifth of the world’s oil supply and most liquefied natural gas exports from the Gulf region pass through these waters. Following the announcement, Brent fell below US$80 from above US$110 per barrel in May.
The problem is that the end of hostilities does not automatically restore normal supply. Shipping lanes littered with security risks during the war still require a recovery process. Sea mines must be cleared first, tankers must return to the Gulf, storage facilities need to be emptied, and refineries and distribution networks must resume full operations. This entire process will take considerable time.
The report notes that many oil buyers remain cautious. New cargo booking activity has not fully recovered as shipping companies and insurers continue to assess residual risks. Some firms have begun seeking vessels to transport oil from the Gulf in the coming days, but most operators prefer to wait for safer sailing conditions.
The biggest bottleneck remains the Strait of Hormuz. The main shipping channel must still be cleared of mines laid during the conflict. The United States has deployed a minesweeper fleet to the area, supported by Britain and France. Even if the clearance proceeds swiftly, industry players estimate that shipping conditions will not fully recover for more than six weeks.
Oil production recovery in the Gulf is also proceeding in stages. Most oil fields in Saudi Arabia and the United Arab Emirates reportedly did not suffer severe damage. Producer nations have room to increase output because they previously cut production when storage capacity began to fill. Production from major fields is expected to be the first to come back online.
Several analysts estimate that Gulf oil production will only reach around 30% to 50% of pre-war levels by mid-July. That figure is expected to rise to 60% to 70% by mid-September. Towards the end of the year, production is forecast to be in the range of 80% to 90% of normal conditions before the conflict erupted.
With this pace of recovery, the world still faces supply constraints in the coming months. Morgan Stanley estimates the global oil market will experience a supply deficit of around 3.4 million barrels per day in the third quarter of 2026. This will continue to drain global oil inventories, which are already at low levels.
Morgan Stanley’s projections place the average Brent price for near-term delivery in the range of US$90 per barrel during July to September 2026. In the final quarter of the year, prices are expected to be around US$80 per barrel. This is roughly US$20 higher than the bank’s forecast in February.
On the demand side, recovery could potentially be faster than supply. China is a major factor drawing attention. During the conflict, the country’s oil imports fell by about 5 million barrels per day. As trade routes reopen and economic activity improves, import demand could rise again in a relatively short time.
Another risk stems from Iran’s new policy regarding the Strait of Hormuz. The Iranian government has established a special authority to manage shipping traffic in the area. Several Iranian officials have signalled that certain fees or levies may be imposed on vessels transiting the strait after the transition period ends.