The reopening of the Strait of Hormuz has ignited a wave of energy supply, with OPEC's crude oil production surging in June, while Citigroup is placing bets on oil prices falling towards $60 per barrel.
According to the latest survey and vessel tracking data, following a provisional peace agreement between the United States and Iran, Persian Gulf member states have rapidly restored the scale of crude oil and natural gas exports through the Strait of Hormuz. Notably, the Organization of the Petroleum Exporting Countries (OPEC) saw a sharp increase in its crude output last month. As supertankers from major producers like Saudi Arabia begin to depart in succession from the recently and orderly reopened Strait, the most dangerous upside tail risk for U.S. inflation is being mitigated. However, this does not equate to the inflation issue being resolved. The primary monetary policy significance of the gradually restored Hormuz shipping lanes lies in reducing the urgency for the Federal Reserve to implement further interest rate hikes.
Survey and tracking data indicate that OPEC's production unexpectedly increased significantly by 2.34 million barrels per day to 18.75 million barrels per day. This increase was strongly driven by three major producers: Kuwait, Saudi Arabia, and Iran. However, this rebound still leaves production substantially below pre-conflict levels in the Middle East. Even before the U.S.-Iran peace deal was reached, Persian Gulf oil producers had found certain special pathways to secretly ship cargo through the Strait of Hormuz, which was largely closed during the initial phase of the Middle East geopolitical conflict starting in late February.
Tanker tracking data shows that, with the U.S.-Iran deal now allowing for more open supertanker traffic, Saudi crude shipments have reached about 90% of their typical pre-war levels. This increase in supply comes as fuel demand in key consumption region Asia remains relatively sluggish, creating gluts in some market segments, erasing almost all of crude oil's wartime price gains, and raising the question of whether OPEC producers will need to compete for customers. Brent crude futures traded around $72 per barrel on Friday.
Following an adjustment for the UAE's exit from OPEC after a key meeting on Sunday, the group's June production was still 7.3 million barrels per day, or 28%, lower than the robust February output level. The UAE's departure from OPEC in May allows it to freely increase production once the Strait is fully stabilized. Iraq had also briefly threatened to potentially leave the group unless it was ultimately granted a higher production quota.
Key members of the broader "OPEC+" producer alliance, which includes countries like Russia, are scheduled to hold a monthly video conference on Sunday to discuss production limits for the next month. A sub-group of seven important producing nations announced a series of small, symbolic production increases during the Iran war to continue advancing the process of restoring output suspended years ago—even if only theoretically. Two delegates this week indicated they expect the August quota to be raised again by a modest 188,000 barrels per day, which is the penultimate monthly stage of this process.
Survey data shows that among OPEC's 11 members, Kuwait recorded the largest increase last month, boosting output by 870,000 barrels per day to 1.36 million barrels per day. The country's production, once slashed by 80% due to the geopolitical conflict, remains significantly below its usual level. The second-largest increase in June came from Saudi Arabia, which raised production by 550,000 barrels per day to an average of 7.2 million barrels per day. This was followed by Iran, which increased output by 510,000 barrels per day to 2.85 million barrels per day and has accumulated a large supply on tankers at sea while struggling to find large-scale buyers.
Within the broader alliance, OPEC+'s core member Russia has remained steadfast in raising its crude exports to record levels following Ukrainian attacks on its refineries, likely diverting supplies that cannot be processed domestically.
U.S. Inflation Pressure Gets a Key Buffer! Wall Street Predicts Major Oil Price Retreat
Following the provisional U.S.-Iran peace agreement, oil and natural gas energy is once again being shipped out of the Persian Gulf on a large scale. Recently, major Wall Street banks including Citigroup, Goldman Sachs, and Morgan Stanley have aligned on a main theme for the commodity market: cutting the "war risk premium" from oil price expectations, consistently lowering their oil price forecasts. The international oil price benchmark, Brent crude futures, traded around $72 per barrel on Friday. This represents a significant retreat from the wartime peak of over $126 per barrel on April 30. Citigroup's projected range of $60–$65 per barrel for the year suggests that the current forward curve has not yet fully priced in the combined pressures of supply recovery, slower-than-expected inventory drawdowns, and a weakening physical market.
Citigroup's strategy team recommends selling oil during any summer price rallies. The core logic is that the U.S.-Iran memorandum of understanding is highly likely to be extended, shipping restoration is eroding the "blockade premium," and demand lacks support from a robust recovery in key fuel consumption in Asian markets like China. Citigroup's bearish view on oil is not simply a bet on "geopolitics disappearing," but rather the belief that the Hormuz risk premium is being systematically squeezed out of oil prices, returning pricing power to supply-demand fundamentals. Under the most pessimistic expectations of oversupply, Citigroup forecasts Brent could fall to $60 per barrel by year-end.
For major asset classes, the retreat in oil prices from wartime highs would weaken inflation expectations, ease upward pressure on long-term interest rates, and improve the cost curve for sectors like aviation, chemicals, transportation, manufacturing, and consumer goods. Regarding equity styles, energy stocks, oil services, and high-beta upstream assets face valuation compression. In contrast, semiconductor leaders in the AI computing chain, along with software, industrial automation, and high-quality growth stocks, may benefit from the combination of "declining inflation tail risk + reduced Fed tightening pressure."
These latest developments in energy supply recovery signify that the "energy-driven inflation shock" previously fueled by the U.S.-Iran war, the Hormuz blockade, and shipping risk premiums is now reversing. If input costs for crude oil, gasoline, diesel, jet fuel, and liquefied natural gas continue to fall, they will first lower the energy components within the U.S. CPI and PCE. Subsequently, through channels like transportation, airfares, chemicals, agricultural inputs, and corporate profit margins, this will begin to undermine reflationary pressures.
For the Federal Reserve, however, this is not a sufficient condition for an immediate shift to easing. Rather, it is a necessary condition for moving from "being forced to guard against reflation" to "awaiting data to confirm the restoration of disinflation." Only if the energy decline further lowers inflation expectations, and core services, wages, and housing inflation cool simultaneously, will the Fed have more substantial grounds to shift from "restrictive rates at high levels" towards genuine easing or a more moderate monetary policy cycle.
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