The international oil price has retreated to its pre-conflict level of around $73 per barrel following a provisional ceasefire agreement between the United States and Iran, suggesting the world's most critical oil and gas chokepoint has returned to normal operations. However, beneath the surface, market order remains far from restored.
Dozens of tankers that were trapped within the Persian Gulf have recently rushed to depart. The U.S. Energy Secretary noted that traffic flows at one point exceeded the pre-war level of roughly 20 million barrels per day. Concurrently, Iran is expected to swiftly ramp up its oil production. According to Rystad projections, if sanction waivers persist, Iran's output could reach 3.3 million barrels per day by year-end.
This surge in supply, however, coincides with a period of tepid short-term demand. Refineries in Asia and Europe have largely completed their crude procurement for July and August, leaving additional crude supplies with nowhere to go. Many tankers may be forced to remain at sea, effectively becoming floating storage. Investors appear to be pricing in a short-term supply glut, with the Brent crude futures curve shifting into contango for the first time since the war began on February 28.
Analysts anticipate the supply overhang may persist for several weeks, but not for an extended period. The International Energy Agency forecasts that global supply will contract by approximately 3.9 million barrels per day in 2026 before rebounding by about 8 million barrels per day in 2027 to around 110.3 million barrels per day. In contrast, demand growth is projected to be relatively modest, potentially creating a latent surplus of about 5 million barrels per day next year.
Despite the export surge, the future of the Strait of Hormuz remains fraught with uncertainty. The provisional U.S.-Iran agreement guarantees freedom of passage for 60 days, while Iran is negotiating a long-term framework with Oman. An incident last Thursday where Iran opened fire on a transiting vessel and exchanged fire with U.S. forces underscores that the situation is far from stable. Data from LSEG indicates that last week, only one in every four departing tankers was entering the Gulf, a rate significantly below pre-conflict levels.
The path back to market balance will be uneven following months of severe disruption, and the current market optimism may be overly sanguine.
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