Thu, 07/02/2026 - 10:22
Of all the assets rattled by the Iran war, none took a more dramatic journey than crude oil. When US and Israeli forces launched strikes on Iranian territory on 28 February, the commodity markets reacted with almost textbook alarm. Brent crude oil surged more than 50% in the weeks that followed, briefly touching an extraordinary $120.88 per barrel on 30 April following the closure of the Strait of Hormuz, the artery through which roughly 20% of the world's traded oil normally flows. The IEA has since described it as the biggest oil supply shock in history. Middle East production shut-ins reached 11.3 million barrels per day in May alone, OECD inventories collapsed to their lowest level since December 1990, and global oil demand fell by an estimated 1.1 million barrels per day as Asian refineries were forced to curtail output due to a lack of crude supplies. It was, by any measure, one of the most violent supply disruptions the energy market has ever seen.
And then, with almost equal speed, the tide began to turn. The signing of a US-Iran memorandum of understanding (MoU) on 17 June, followed by the formal reopening of the Strait, sent Brent tumbling nearly 5% in a single session. But that was just the beginning of the sell-off. As of 2 July, Brent is trading at $71.50 per barrel, just $3 higher than a year ago and a world away from the spikes of late April. The question now is whether this relief-driven descent has further to run, or whether the market has, in fact, overcorrected in its haste to price in the best-case scenario. The war shocked the oil market in one direction. The peace deal is now doing the same in the other, and in both cases, traders appear to have moved faster than the physical market can keep pace. The forces at play split neatly into two distinct but interconnected themes: the logistics of supply recovery and the structural outlook for demand.
Supply chains, mines, and a fragile ceasefire
The headline story is seductive in its simplicity: a peace deal is signed, the Strait reopens, and oil promptly falls. The underlying picture, however, is considerably messier. As Vanda Insights founder Vandana Hari put it, "The market is front-running the prospective reopening of the Strait of Hormuz and likely pricing in the best-case scenario for the normalisation of flows, which means the potential hiccups from logistics to renewed geopolitical tensions are not being adequately factored in." Those hiccups are real and plentiful. Despite the MoU, Iran has been unequivocal that it retains sovereignty over the Strait and will do so beyond the current 60-day negotiating window, which contradicts much of Trump's rhetoric and leaves the long-term governance of this critical waterway unresolved. The shipping industry remains cautious: BIMCO, the global shipping trade group, noted that Iran had mined large segments of the Strait during the conflict, and that the security situation "remains volatile" despite political progress. Flows through the Strait have risen from a May low of 9.6 million barrels per day to around 12 million barrels per day, but a full pre-conflict recovery is expected to take until early 2027 at the earliest, with the IEA projecting that global oil supply will fall by 3.9 million barrels per day on average across 2026 as a whole.
Meanwhile, OECD inventories have dwindled to levels not seen since January 2003, and replenishing those buffers will take time and a sustained flow of supply, neither of which can be taken for granted while the peace remains fragile and the mine-clearing operation continues. The ceasefire has already been tested once, with Iran attacking two transiting vessels after the MoU was signed, before pulling back. In short, the physical oil market remains far tighter than the spot price would currently suggest, and any deterioration in the diplomatic picture could see a rapid return to a bull market.
Demand destruction, OPEC's dilemma and the longer-term outlook
If supply recovery is the wild card in the near term, demand dynamics are shaping the medium-term picture in ways that are equally complex. The war didn't just disrupt supply; it also damaged demand. This is particularly true across Asia, which is the region most exposed to Middle East crude flows. The EIA now forecasts that global oil demand will decrease by 1.1 million barrels per day over the course of 2026, marking a dramatic reversal from its February forecast of 1.2 million barrels per day growth. China's crude imports fell to an average of 9.4 million barrels per day in April as refinery runs contracted, and demand across non-OECD Asia has undershot even the most pessimistic pre-conflict estimates. This demand destruction, combined with the prospect of supply normalisation as Hormuz flows gradually recover, has prompted a significant rethink among the big commodity forecasters.
J.P. Morgan, which had been broadly bullish heading into 2026, is now projecting Brent at around $60 per barrel for the year, suggesting further downside from current levels. The IEA, for its part, projects a significant supply overhang emerging in 2027, with global supplies set to surge by around 8 million barrels per day to 110 million barrels per day against demand growth of just 2 million barrels per day. This marks a structural shift that would weigh heavily on prices well beyond this year's conflict-driven volatility. There's also OPEC+, which faces perhaps its most awkward strategic decision in years. If it moves too quickly to restore production, it risks flooding a market still recovering from demand destruction. If it holds off too long, it could lose market share to non-OPEC producers such as the US, Brazil, Canada and Guyana, which have been steadily expanding output throughout the crisis. How the cartel navigates that dilemma, alongside the pace of Strait normalisation and the durability of the Iran ceasefire, will do more than anything else to determine where oil is trading when the year draws to a close.
Trade CFDs on oil and more
With Libertex, you can trade CFDs on a wide range of underlying assets, from stocks, ETFs and indices to crypto, forex and commodities. In addition to Brent crude and WTI, Libertex offers CFDs on a broad range of other energy and commodity instruments. For more information or to open a live trading account, sign up to the website www.libertex.com/signup today.
