Geopolitical frictions in the Middle East and a renewed drop in Strait of Hormuz flows have pushed crude prices back above the $100 per barrel threshold. A combination of firmer physical differentials and rising freight rates resembles the market conditions seen back in April, though the negative feedback loop between high prices and downstream demand is expected to reassert itself.
As of the 10 September close, NYMEX light sweet crude for October delivery settled $3.02 higher at $96.05 per barrel, a gain of 3.25%, while November Brent futures on ICE advanced $3.29 to settle at $101.21 per barrel, up 3.36%. Domestic SC crude futures also climbed 7.00% to close at 773 yuan per barrel at the 2:30 AM settlement.
An escalation in Middle East tensions drove Brent futures above $100 per barrel for the first time since 24 July, stoking increasing concerns about regional supply security. Since early last month, Brent has appreciated by roughly 25% as hopes for a permanent resolution to US-Iran tensions fade. A growing list of investment banks, including Goldman Sachs, Bank of America and HSBC, has recently raised its price forecasts for crude.
Data from Rystad Energy's chief economist Claudio Galimberti indicated that in the week preceding the 30 August US-Iran resumption, daily flows through the Strait of Hormuz were around 8–9 million barrels, roughly double the prior week's level, but have since dropped to under 2 million barrels per day. Despite higher output from non-OPEC producers such as the US, Canada and Guyana, the International Energy Agency stated last month that it expects global oil supply to decline by 4.3 million barrels per day this year, a reduction of around 4%.
According to the EIA's Short-Term Energy Outlook, Middle East oil production is expected to rise over the coming months, largely driven by gradually recovering transit volumes through the Strait of Hormuz and the use of alternative export routes outside the region. However, the EIA assumes that restrictions on Middle East oil exports will persist through the end of this year, leaving regional crude output below pre-conflict levels until the second quarter of 2027. The agency projects Brent spot prices will average about $90 per barrel in the second half of 2026, easing gradually toward an average of $74 per barrel in 2027 as supply expands and inventories rebuild.
Russia's oil and gas revenues for the first eight months of the year came in at roughly 5.02 trillion rubles (about $86 per dollar), down 16.7% year-on-year. According to a preliminary assessment published on the finance ministry's website, the revenue decline was mainly due to a weaker dollar exchange rate and lower oil prices in the fourth quarter of 2025 and first quarter of 2026. The ministry noted that using the National Wealth Fund to compensate for lost oil and gas revenues, while accumulating extra income during favourable pricing periods, helps maintain budget stability amid revenue volatility. Preliminary estimates put total federal budget revenues at approximately 25.93 trillion rubles for the first eight months, up 9.2% year-on-year, with non-oil and gas revenues of around 20.91 trillion rubles, an increase of 18.1%.
The EIA now expects the US to re-impose an embargo on Iranian exports and restrict Iranian oil shipments through sanctions, thereby curtailing output. The agency also forecasts that global oil inventories have declined by 400 million barrels in 2026 and will continue to draw down through the end of the year.
Morgan Stanley's global co-head of oil trading, Brendan Ross, said oil traders are becoming increasingly cautious about holding long-dated positions as the Russia-Ukraine and Middle East conflicts cloud the outlook for the months ahead. Traders are concentrating derivative exposure into shorter time frames and adopting a more sober, objective approach to risk. With geopolitical risk on the rise, they are now more selective, shifting from broad derivative exposure toward specific instruments. Ross noted that risk management has become more precise, with market participants identifying exactly what they want while cutting out unwanted noise. This has resulted in thinner liquidity, especially in longer-dated contracts, with trading activity focused mainly on the next three to six months, and the liquidity shortfall further amplifying itself. As for the disconnect between physical and financial markets, he said it is most apparent in the refined products segment.
The Mexican government plans to slash fiscal support for debt payments at state-owned oil company Pemex to 81.1 billion pesos (around $4.8 billion) in 2027, a cut of nearly 70% from this year's budgeted 263.5 billion pesos. Last year, Mexico allocated $14 billion in capital injections under its 2026 budget to help the company service debt. The government also completed a $10 billion buyback operation aimed at extinguishing debt maturing this year. According to the company's latest financial report, its debt maturing next year stands at about $5 billion. While these injections have averted immediate distress, such support masks deeper problems, including an oversized workforce and a persistent decline in crude extraction from increasingly mature wells.
Given the renewed escalation in Middle East tensions and the recent drop in Strait of Hormuz flows, prices have broken back above $100 per barrel, with physical differentials and freight rates also surging in tandem. These conditions are reminiscent of April this year, but we maintain that under current market characteristics, Chinese refineries are likely to again cut utilisation rates substantially, thereby enabling a rebalancing between Strait flows and Chinese demand. The negative feedback loop between oil prices and demand remains intact.
Geopolitical factors and sentiment could drive prices higher in the near term, but the demand-side negative feedback cannot sustain elevated crude values. We recommend building short positions on rallies while buying call options for downside protection against the risk of a Middle East de-escalation, a reopening of the strait, or a global economic crisis. Upside risks include a stronger-than-expected Chinese demand recovery or further deterioration in the Red Sea and broader Middle East situation.
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