Crude oil prices declined last week to levels not seen since the onset of the US-Iran conflict earlier this year, following the announcement of an interim peace agreement between the two nations. The accord, which includes the reopening of the Strait of Hormuz after roughly four months of closure, initially pushed Brent crude to settle at approximately $80.57 per barrel on Friday—a weekly drop of 7.7%—though prices remain around 30% higher year-to-date. The reopening of the critical shipping route, a key artery for global oil supply, was met with cautious optimism amid ongoing regional tensions.

Despite the agreement, Iran declared the Strait of Hormuz closed again over the weekend, citing ceasefire violations in southern Lebanon. Nevertheless, Iranian negotiators continued to participate in talks in Switzerland, underscoring the fragile nature of the peace process. Meanwhile, the Russia-Ukraine conflict intensified, with increased attacks targeting Russian oil infrastructure deep within its territory, adding further volatility to global markets.

The post-agreement environment has introduced conflicting signals in the oil market. Iran announced that vessels transiting the strait would require its permission, mandatory insurance (a cost previously not enforced), adherence to prescribed routes, and possible future tolls. Conversely, Western naval forces overseeing regional security assert the southern Omani route remains accessible around the clock, with the US advising vessels to transit without broadcasting their positions. Persistent risks such as reported naval mines near Oman’s coast and in the middle of the strait have contributed to slowed tanker traffic and heightened market caution.

On the demand front, the prolonged conflict and resulting supply disruptions have indirectly dampened oil consumption, leading to downward revisions in 2026 forecasts. The International Energy Agency (IEA) downgraded its demand outlook by 1.7 million barrels per day (mb/d) since January, now projecting a contraction of 1.1 mb/d for the year. The US Energy Information Administration (EIA) is more pessimistic, having cut its forecast by nearly 2 mb/d, while OPEC also trimmed its growth projection for the second consecutive month. Contributing factors include reduced Chinese imports and lower refinery runs in Asia. Despite these trends, analysts anticipate a recovery beginning in the fourth quarter of 2026, driven by seasonal demand increases, eased prices, and pent-up Chinese buying.

Supply dynamics reflect an ongoing ramp-up by Gulf producers following months of disruption. Nearly 80 million barrels of crude are currently stored on roughly 40 supertankers in the Persian Gulf, awaiting transit through the strait, while more than 100 laden vessels remain stuck inside the region. Market watchers expect approximately 90% of the impacted production to resume by year-end. Notably, Iran has shipped around 20 million barrels from Chabahar and resumed loadings from Kharg Island after the US lifted its naval blockade. Iraq has ordered increased output from five major fields with targets reaching 3 mb/d, while Kuwait aims to surpass 2 mb/d imminently. The UAE continues to expand pipeline infrastructure bypassing the strait and has instructed customers to resume cargo loadings. OPEC production, excluding the UAE, stood at 16.7 mb/d in May 2026.

Production levels in May reflected the impact of the conflict and blockade, with OPEC output falling by approximately 1.2 mb/d to 16.3 mb/d (excluding the UAE). Iran posted the steepest decline, with output dropping nearly 710,000 barrels per day (tb/d) to an average of 3.1 mb/d. Kuwait and Saudi Arabia also registered month-on-month decreases, partially offset by increases in Venezuela and Iraq. Independent and secondary sources largely corroborate these trends, though discrepancies exist regarding exact output figures. Overall, Gulf production remained about 13.6 mb/d below pre-war levels.

Despite the physical supply constraints, OPEC+ has continued with a gradual unwinding of voluntary production cuts, approving successive monthly quota increases since the first quarter of 2026. However, these adjustments have been largely symbolic given the actual delivery challenges posed by the regional conflict and strait closure. The group affirmed its commitment to a cautious and flexible approach regarding future production adjustments.

Looking forward, forecasts for 2027 suggest a robust resurgence in global oil demand and supply. The IEA projects demand could grow by 2 mb/d, aided by restored energy corridors and lower prices, while the EIA anticipates an even steeper increase of 2.5 mb/d. OPEC aligns with this outlook, predicting demand growth of approximately 1.7 mb/d. Supply is also expected to expand sharply, with the IEA forecasting an 8 mb/d increase driven by Middle East export normalization and raised OPEC+ targets. The EIA and OPEC project more moderate, yet significant, supply growth, underpinning a likely recovery in market balance over the next year.

Longer-term projections by OPEC emphasize sustained demand growth through mid-century, driven primarily by rising consumption in non-OECD countries, including India, Africa, and the Middle East. These trends reflect broader factors such as population growth, urbanization, and rising living standards in developing economies.

In sum, while the US-Iran interim peace deal offers a glimmer of relief for global oil markets by reopening a vital shipping corridor, ongoing regional tensions, coupled with geopolitical uncertainties and complex supply-demand dynamics, continue to foster volatility and cautious market sentiment.