No strait path to oversupply

The oil market’s projected glut is facing its first test: Iran declared the Strait of Hormuz closed after attacking a commercial vessel, and the US responded with fresh strikes — directly threatening the Gulf supply recovery that underpins forecasts for an oil surplus. The US said commercial traffic has not stopped entirely, leaving the immediate supply impact unclear.

The contradiction comes down to one assumption: The International Energy Agency (IEA)’s forecast assumes Gulf production and Hormuz transits gradually recover through the second half of this year, but renewed strikes have put that recovery in doubt and could “upend” the outlook altogether, the agency warned in its latest oil market report.

The base case: Global oil supply is expected to fall by 3.7 mn bbl / d to 102.6 mn bbl / d in 2026, leaving the market in a 900k bbl / d deficit. Supply would then rebound sharply in 2027 as Gulf production recovers and non-Opec+ producers add another 2.2 mn bbl / d, creating an average surplus of 4.6 mn bbl / d that peaks at 5.6 mn bbl / d in 2Q. The agency has already cut the projected 2027 overhang by 400k bbl / d following the latest escalation.

The risk case: Hormuz traffic stalls again, the US reinstates its blockade on Iranian barrels, or renewed strikes delay the recovery of Gulf production. Any of those outcomes would remove barrels underpinning the IEA’s surplus forecast — while a combination could turn the outlook on its head.

So why is oil still below USD 80 / bbl? Brent had jumped nearly 5% after US President Donald Trump declared the ceasefire “over,” and subsequently rose nearly 4% amid renewed US-Iran tensions threatening Hormuz shipments — with Brent jumping to USD 79.11 / bbl. The market appears to be hedging that the US and Iran will keep up a “fight and talk” pattern, allowing Iranian cargoes and shipments tolerated by Tehran to keep moving even without a formal agreement, David Goldwyn, Atlantic Council energy advisor, told S&P Global. Most of the oil that passed through during the short-lived truce came from Iran or countries that had reached arrangements with the country, Goldwyn said. Those flows may continue despite the renewed fighting, limiting the immediate effect on global supply.

That assumption has limits: Trump has threatened to reinstate a blockade targeting Iran, which could remove an estimated 1.5-2 mn bbl / d of Iranian exports from the market, Goldwyn added. Strikes against Gulf producers could also delay the broader supply recovery or knock production offline again.

Shipping is already responding: Vessel transits through Hormuz fell 15% by the end of last week as shipowners turned cautious, with some reports pointing out that oil-tanker traffic slowed to a near standstill. Around 200 mn barrels escaped the Gulf during the truce, Transversal Consulting President Ellen Wald told S&P Global — equivalent to only about two days of global consumption. Those barrels gave the market breathing room, but did not create a lasting cushion. Much of the increase came from vessels already trapped inside the Gulf rather than sustained flows from new production and storage, Horizon Engage Senior Adviser Rachel Ziemba said.

Before the latest escalation, the recovery was gaining traction: US naval escorts and sanctions relief had lifted Hormuz traffic to more than 70% of pre-war levels by late June. Arabian Gulf seaborne loadings rose 53% in June, with the UAE accounting for much of the recovery, raising output by 1.6 mn bbl / d to 4.1 mn bbl / d. Even after those gains, Gulf supplies remained 11.4 mn bbl / d below pre-war levels.

REMEMBER- Opec had begun restoring production into a market expected to become heavily oversupplied. Renewed disruptions could justify the increases in the short term, but a sudden normalization of Gulf flows could leave the alliance adding barrels just as the expected glut arrives.