Morgan Stanley has lowered its crude oil price projections for the second time in roughly two weeks, cautioning that the global petroleum market is accelerating towards a state of oversupply. A faster-than-expected restoration of traffic through the Strait of Hormuz, combined with robust US output and subdued Chinese demand, is weighing on the outlook for oil.
In a recent report, analysts including Martijn Rats reduced their average price forecast for the physical trading benchmark Dated Brent by $15 to $75 per barrel for the third quarter and by $5 to $75 per barrel for the fourth quarter. They also lowered their projections for all four quarters of next year, anticipating the benchmark price will decline to $70 per barrel by the end of 2027.
The analysts noted in the report, "As the market's focus shifts to 2027, the situation has come full circle—returning to oversupply."
Brent crude futures have fallen approximately 30% this quarter, marking the largest quarterly drop since 2020. The immediate trigger for this decline was a provisional ceasefire agreement between the US and Iran, which led to a partial resumption of shipping through the Strait of Hormuz. The sharp retreat in oil prices has prompted several institutions to revisit their forecasts, with Goldman Sachs also revising down its fourth-quarter Brent projection to $80 per barrel.
Hormuz Recovery Exceeds Expectations, Concentrating Supply Pressure
Morgan Stanley identified the quicker-than-anticipated reopening of the Strait of Hormuz as the primary driver behind this round of forecast downgrades. The report indicated that last Thursday, 35 oil and gas tankers transited out of the Persian Gulf via the strait, marking the first return to the pre-conflict normal range of 30 to 40 vessels since the conflict erupted in February.
Although two vessels were attacked over the weekend, causing a brief slowdown in traffic, flows have since recovered, signaling that shipping companies are willing to continue using the Strait of Hormuz. This is viewed as a key indicator of market normalization.
Morgan Stanley's calculations suggest that to achieve oil market balance by 2027, traffic through Hormuz only needs to recover to about 65% of pre-conflict levels, or approximately 11 to 12 million barrels per day—a relatively low threshold implying persistent pressure from returning supply.
US Supply and Chinese Demand Create a "Dual Drag"
Morgan Stanley described strong US exports and weak Chinese imports as a "dual drag" on the current oil market, arguing that these forces will continue to weigh on the market even if the Hormuz situation stabilizes.
Regarding Chinese demand, the report simply referred to "subdued Chinese imports" without offering further optimistic predictions, implying that demand-side uncertainty remains a significant variable for the market.
The most active Brent futures contract for September settled at $73.41 per barrel on Tuesday, a substantial decline from its April peak above $126, with wartime premium largely evaporated. Negotiations for a permanent ceasefire between the US and Iran are ongoing.
Futures Structure and Spot Signals Both Point to Market Weakness
Morgan Stanley cited several recent market signals supporting its view of near-term supply abundance. These include the crude futures curve shifting into a bearish contango structure—where near-month contracts trade at a discount to later-dated ones, typically reflecting expectations of ample current supply.
Furthermore, some West African crude cargoes have been "priced at distressed levels," and floating storage volumes have increased, providing further evidence of pressure in the physical market.
"Setting aside the narrative for a moment and just looking at the prices themselves," the Morgan Stanley analysts wrote, "they paint a picture of a market that is weakening across the board."
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