The first half of 2026 has delivered dramatic shifts in the crude oil market, fundamentally reshaping supply and demand dynamics and setting the stage for a significant downward adjustment in price levels.
Market Overview
Oil prices have retreated to around $70 per barrel before June has even concluded, a scenario few market participants anticipated at the start of the year. The first half of 2026 will be remembered as a period of extreme volatility in oil futures history. Prices experienced a rapid and violent cycle, surging to $120 per barrel in March, entering a phase of high volatility in April and May, and then collapsing back to pre-conflict levels by late June. This breakneck pace left many investors struggling to keep up. Within just four months, the oil market was turned upside down. What began with the US-led capture of Venezuelan President Maduro in January was merely a prelude. Before the market could fully adjust, a military operation by the US and Israel against Iran on February 28th triggered a conflict. Iran's subsequent blockade of the Strait of Hormuz disrupted approximately 20 million barrels per day of oil transit from the Gulf, plunging the market into panic and sending prices soaring. Prices remained at extremely elevated and volatile levels for a sustained period, with daily price swings at the conflict's onset exceeding the total annual volatility seen in the previous year. The market then entered a complex phase, torn between anxiety over supply disruptions and efforts by the US administration to calm markets through a temporary ceasefire and repeated public statements about an impending deal with Iran. Ultimately, to control prices, a memorandum of understanding was signed, leading to the Strait's reopening and the erosion of geopolitical risk premium, allowing prices to fall back near pre-war levels.
This price surge was initiated by political decisions, and its rapid cooling was similarly driven by political efforts. The events of the past six months have reinforced crude oil's unique status as the king of commodities, demonstrating its role as a critical instrument in geopolitical maneuvering. The process also highlighted the immense market impact wielded by political figures with vast social media influence. The disruption of previously stable supply and demand fundamentals exposed the lagging and often inaccurate nature of fundamental data, which misled many market analysts and industrial clients who rely on such data for decision-making—a regrettable outcome. While data in April and May suggested near-total transit disruption, subsequent information revealed that multiple Gulf nations had been facilitating continuous 'dark' transits via loaded vessels since April, a capability later described as "impressive" by the IEA. Third-party tracking data indicated that actual crude flows through the Strait during the blockade were significantly higher than market expectations. With the signing of the memorandum, transit volumes accelerated further in June, with the latest data showing June transits rising to about 4.8 million barrels per day. Factoring in pipeline exports from Saudi Arabia and the UAE, the supply impact of the blockade was far less severe than initially feared, though this realization came too late for many. The market, however, was efficient, with the subsequent weakening of spot prices, time spreads, and calendar spreads from May onwards reflecting the evolving reality.
Crude Oil Supply Dynamics
1. US-Iran De-escalation and a Major Revision to Global Supply-Demand Balance
The Strait blockade created a massive global supply deficit in the first half of the year. With the Strait reopening, the market is poised to return to a surplus in the second half. The geopolitical shock radically altered the supply landscape. Last year, as OPEC+ gradually exited production cuts, the global market was in a state of oversupply, keeping prices under pressure. Entering 2026, US actions against Venezuela and Iran completely reversed global trade flows and supply patterns. The intensifying conflict, culminating in a dual naval blockade of the Strait in mid-April, severely hampered Gulf exports, which plummeted from a pre-blockade level to a low point. From a supply-demand balance perspective, the EIA continuously revised its forecasts, shifting from an expectation of a 2.83 million barrel per day surplus pre-conflict to a projected deficit of approximately 3.82 million barrels per day for the full year by June—a dramatic swing.
Assuming a normal Gulf export flow of around 15 million barrels per day and a 100-day closure, the estimated supply shortfall was approximately 3.69 million barrels per day. This was partially offset through several channels: IEA strategic stockpile releases of about 2.5 million barrels per day; continued Gulf transit of around 2.5 million barrels per day via alternative routes; increased exports from UAE and Saudi Arabia via Yanbu and Fujairah ports, adding about 3.51 million barrels per day; a surge in US exports, up by roughly 0.8 million barrels per day year-on-year, filling gaps for countries like Japan and South Korea; and a significant reduction in China's seaborne imports, which fell by an estimated 2 million barrels per day post-conflict, as high prices dampened demand and the country drew on reserves purchased cheaply in 2025. In total, global efforts offset about 11.31 million barrels per day of the potential loss, leaving a net deficit of 3.69 million barrels per day.
While these offsetting measures were substantial, elements like US exports, SPR releases, and reduced Chinese demand carry significant uncertainty. Global inventories have been drawn down at a rapid pace to seasonally low levels. The supply-demand outlook has been radically revised from a severe surplus to a deficit for 2026. By June, with de-escalation hopes, the EIA's Short-Term Energy Outlook projected the global deficit would narrow by December and flip to a surplus by early 2027. Given the high elasticity in current fundamentals, supply-demand data will likely see further significant adjustments in the second half based on Strait transit progress. With the Strait reopening ahead of schedule, the threshold for restoring Middle Eastern supply may be lower. If转运港s remain operational, Gulf exports need only recover to about 11.49 million barrels per day to normalize regional supply. Furthermore, if sanctions on Iran are lifted, its tanker fleet could quickly add up to 3 million barrels per day. Other Gulf nations like Kuwait and Iraq also have the potential to restore output faster than expected. Barring further escalation, supply is set to rebound strongly in the second half, leading to a "tight first, loose later" annual balance.
2. Limited Global Supply Growth, Significant Middle Eastern Recovery Potential
Global supply was severely disrupted in H1, with limited spare capacity outside the Middle East to fill the gap. The US, a key non-OPEC supplier, saw production plateau. Years of low prices and the energy transition have dampened upstream investment. Growth outside the Permian Basin has stalled, and even Permian growth has slowed. Producers, initially cautious due to the perceived short-term nature of the conflict, were slow to respond to the price spike. Leading indicators like US rig counts and fracking fleet numbers suggest limited near-term capacity for a significant production surge. Major producers are sticking to annual plans, constrained by high full-cycle costs and improved fleet efficiency.
Russia, possessing significant spare capacity, has seen its output decline due to ongoing Ukrainian drone attacks on its energy infrastructure, limiting its ability to boost exports. In the Middle East, production fell sharply due to the blockade, but with the memorandum signed, a recovery is imminent. The speed of recovery is uncertain, with EIA projecting a return to pre-war OPEC supply levels by year-end, though statements from countries like Kuwait and the UAE suggest a faster pace. If转运港s remain active, full Strait transit recovery may not be necessary to restore overall supply.
Supply growth from other non-OPEC+ regions has been positive but modest. IEA data shows a monthly increase, driven by the US, UAE, and biofuels, partly offset by maintenance-related declines elsewhere. For 2026, non-OPEC+ supply growth is forecast at 0.82 million barrels per day, a figure depressed by Gulf outages. Excluding Gulf producers, the growth estimate is higher, concentrated in the Americas.
In summary, the three major supply pillars face constraints: US growth is limited by capital discipline, Russia is hampered by infrastructure attacks, and non-OPEC+ growth is modest. During the Gulf disruption, these increments were insufficient to offset Middle Eastern losses. However, with de-escalation, Middle Eastern supply is poised for a staged recovery.
3. Reshuffled Global Trade Flows, US Becomes Net Exporter
Global crude trade flows are undergoing a profound reshuffle, with the US becoming a net exporter—a rare occurrence in recent decades. The Middle Eastern supply gap created structural shortages, particularly for Asian nations like Japan and South Korea, which increased purchases of US crude. EIA data shows strong US exports, briefly making the US a net exporter in late April—an extremely rare event. With US inventories at critically low levels, the possibility of export restrictions or taxes cannot be ruled out.
Another major variable is the sharp reduction in China's imports. According to data, China's seaborne crude imports fell dramatically from March to June. This demand reduction played a crucial balancing role in the global market, mitigating the impact of the Middle Eastern shortfall. This was possible due to China's strategic stockpiling during the 2025 low-price period and weaker domestic refining margins. Initially, China maintained purchases from Middle Eastern转运港s, but later reduced them, with the released barrels being picked up by other Asian nations. This dynamic, combined with increased US exports, helped buffer the supply shock.
4. Global Inventories Depleted, Strait Reopening Urgent
Global crude inventories have been depleted to critical levels, making the Strait's reopening imperative. The prolonged conflict caused a rapid drawdown from surplus to levels near seasonal averages. Total global petroleum inventories have declined significantly since February. Initially, floating storage releases, international stockpile sales, and转运港分流 provided a buffer, but as these buffers diminished, supply tightened again, risking another price spike. This explains the urgency behind the diplomatic push for a deal in mid-June.
US crude inventories are at a particularly precarious level, having declined for consecutive weeks to multi-year lows across commercial, Cushing, and strategic reserves. At the current draw rate, US commercial stocks could fall below 400 million barrels by mid-July, approaching operational minimums. Cushing inventory is also nearing its minimum operating level. This critically low inventory situation underscores the political motivation for securing a deal with significant concessions. If the Strait had remained closed, tightening inventories could have driven another fundamental price rally, difficult to counter with political rhetoric. Currently, WTI prices have retreated, but the synchronous decline in Cushing stocks and price spreads suggests the sell-off may have overshot.
In contrast, China's inventory position appears more comfortable. Since 2025, China has been actively filling its strategic and commercial reserves during periods of low prices. As of early 2026, its stockpiles were at elevated levels, providing greater supply resilience and buffer space compared to other Asian nations.
Crude Oil Demand Dynamics
1. Overall Demand: Asian Markets Hit Hard by Supply Disruption
The conflict suppressed demand via both supply chain disruption and high prices. With the Strait handling 70% of Asia's crude imports, Asian consumers were hit hardest. Data shows Asian imports halved in May. Inventories outside China were drawn down rapidly due to limited strategic depth. Global visible stocks are near 2018 lows. The memorandum and potential Strait reopening could trigger restocking demand, but its scale depends on the deal's effectiveness and actual transit recovery.
2. China Demand: Weak Processing and Consumption, High Inventories
In H1 2026, Chinese crude processing and product consumption were weak due to geopolitical shocks and demand transition. High import costs and domestic price caps squeezed refinery margins, leading to lower throughput and operating rates. Crude processing hit multi-year lows. Terminal demand was impacted by electric vehicle substitution, leading to slower gasoline and diesel growth. Apparent product consumption fell year-on-year. High inventories accumulated in previous years provided a buffer against the supply shock. Both crude imports and product exports declined in the first four months.
3. US Demand: High Runs and Record Exports, Inventories Drained
The US became a key supplier to fill the global gap. High crack spreads drove refineries to operate at near-maximum capacity, with runs and utilization rates at multi-year highs. Product demand remained robust seasonally. To buffer the global shock, the US released significant volumes from its Strategic Petroleum Reserve, drawing it down to its lowest level since 1983. Both crude and product inventories are at very low levels. High margins drove record crude exports, briefly making the US a net exporter.
4. India Demand: Capitalizing on Russian Oil, Steady Consumption
Indian refinery runs remained relatively stable at high levels. To mitigate Middle Eastern disruptions, India also drew on its SPR. Product demand showed steady seasonal growth. India capitalized on extended US waivers for Russian oil imports, averaging high volumes in H1, which helped buffer the drop in Middle Eastern supply and eventually supported a recovery in commercial stocks. Product exports fell sharply due to domestic policies and consumption needs.
5. Europe Demand: Stable Consumption, Rising US Imports
Europe was less affected by the Middle East crisis. Oil demand was weak but stable, with jet fuel providing some offset. Refinery runs likely tracked seasonal patterns at lower levels. Product demand was stable year-on-year. Inventories did not draw down as severely as in Asia, supported by increased imports from the US. European imports from the US surged year-on-year, while imports from other regions declined.
Tanker Market
The 60-day negotiation period and potential sanctions relief for Iranian oil present a dual impact on the tanker market. On the demand side, the free flow of Iranian oil adds volume, while consumer nations may rush to restock following the price drop, especially in Asia. OECD inventories are projected to hit multi-decade lows by year-end, suggesting strong restocking potential. The practice of ship-to-ship transfers in the Gulf of Oman, while inefficient, is a supportive factor for ton-mile demand.
On the supply side, vessel positioning data indicates an imbalance, with a higher ratio of ballasting VLCCs in the Atlantic versus the Pacific. This suggests that the Strait's reopening may outpace the repositioning of vessel capacity, creating a window of tight tonnage supply in key loading regions, which could push freight rates higher. Major operators are already positioning vessels, signaling expectations of a strong market. Freight rates for Middle East to China routes are at historically high levels. The near-term outlook is for volatile but rising rates, with mid-term drivers being restocking demand and the phase-out of older vessels.
Second Half Outlook
In late June, macro markets appeared to be pricing in a recession, leading to a broad-based commodity sell-off. The oil price surge earlier in the year planted seeds of economic concern, leading to downgraded growth forecasts and heightened expectations for central bank tightening, which strengthened the dollar and pressured commodity prices. Oil prices have retraced all geopolitical gains. With the Strait reopening and supply rebounding, the market is beginning to price in a potential return to surplus. Asian buyers remain on the sidelines, lacking buying appetite and exacerbating the bearish sentiment. The sharp price decline is the combined result of recessionary macro trading, fading geopolitical risk, and resurgent surplus expectations, exceeding most prior forecasts.
The second half will see the market adapting to massive potential shifts. Gulf producers risk retaliatory production increases, with a short-term potential exceeding 10 million barrels per day. OPEC+ has already raised output targets, but not all members are satisfied; there have been rumors and real tensions within the alliance, highlighting a strong desire among producers to raise output. For consumer nations, especially in Asia, the conflict served as a stark lesson on the need for increased strategic reserves, which could generate demand for hundreds of millions of barrels, though the timing is uncertain. As prices fall, the recovery of demand previously destroyed by high prices is another key variable. The lack of a clear demand recovery in China in June is a concern, as high prices may have accelerated its energy transition, leading to a slower demand rebound.
Overall, in a base case excluding further geopolitical uncertainty, both supply and demand are expected to grow in the second half, but supply growth potential significantly outweighs demand growth. This will be the core factor for price assessment. The price center of gravity is expected to shift notably lower compared to the first half. Brent crude is projected to trade in a $65-$90 per barrel range, with corresponding adjustments for other benchmarks. If a market share war erupts among producers, the market could return to severe oversupply, potentially pushing the price center another $10 per barrel lower.
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