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Even if peace breaks out in the Middle East, it will be months before the oil market returns to anything resembling normal—and much of the industry may never be the same.
The lag in restoring operations after the largest supply disruption in history will keep oil prices elevated for months, and will likely add a smaller premium for well over a year, experts say. On Wednesday, oil prices were falling on news that the U.S. and Iran were close to agreeing to the framework of a peace deal. Brent crude futures, the international benchmark, settled down 7.8% to $101.27. The State Street Energy Select Sector SPDR exchange-traded fund was down 4.1%, with Exxon Mobil falling 4.3%.
But investors shouldn’t expect oil prices to drop much more in the near-term, analysts said. Gasoline, too, could stay elevated. Average prices hit a multiyear high on Wednesday of $4.54 per gallon.
In recent days, analysts have been hiking their oil price estimates for the rest of 2026 to over $100 per barrel. Raymond James analyst John Freeman sees Brent prices at $110 in the third quarter and $100 in the fourth, he wrote in a note on Monday. Elevated prices could last into 2027. His average Brent price estimate is at $90 in the second quarter of next year.
“Predicting prices in the hyper-volatile world of war, jawboning, and social media posts is nearly impossible, but we’re confident in this: Physical market impacts are extreme, and the consequences for the oil market will be very long-lasting regardless of how soon the conflict may end,” he wrote. The news about a possible deal between the U.S. and Iran doesn’t change his price expectations, Freeman wrote in an email on Wednesday.
Noah Barrett, lead energy and utilities analyst at Janus Henderson, said in an interview that he considers Wednesday’s drop in oil stocks to be a buying opportunity. “I would be a buyer on the weakness today or continued weakness,” he said. Barrett said he’d focus on companies without much exposure to the Middle East, who drill in places like the U.S., Canada, and Latin America.
If the war does in fact wind down, the oil industry will still be stuck in deficit for a while. About 20% of the world’s oil normally flows through the Strait of Hormuz, but the Iranian and U.S. blockades have stopped almost all of it from flowing. About 5 million barrels of oil from Saudi Arabia and the U.A.E. have been rerouted to other pipelines away from the Strait, but that’s only a partial release valve.
Middle Eastern countries have shut in more than 11 million barrels of daily oil production. Those operations don’t simply turn back on immediately. In March, Shaikh Nawaf Al-Sabah, the CEO of Kuwait Petroleum Corporation, told a Houston energy conference that some production would likely take months to restore.
Even in an optimistic scenario, “meaningful” amounts of oil won’t move through the Strait until June, with volumes climbing back to 80% to 90% of normal by July, wrote Paola Rodriguez-Masiu, Rystad Energy’s chief oil analyst. “The physical market does not run on political timelines,” she says.
The cumulative size of the oil market’s deficit has ballooned. About 1 billion barrels of oil that would normally have been produced and sent to customers between the start of the war and today never made it to their end destination. To make up for the shortfall, countries are on pace to empty their oil storage tanks at a rate of about 5.5 million barrels a day this quarter—the most ever, according to S&P Global Energy. Once production is restored, they’ll need to replenish those stockpiles, boosting demand and elevating prices even more.
What’s more, the war has done long-lasting damage to infrastructure, and some facilities could take years to come back—if they come back at all.
Oil equipment company NOV said on its earnings call last week that between 500,000 and 2.5 million barrels of oil production may be permanently lost because of the war. Shutting in wells in a hurry can damage them, or make the restart prices too difficult. Barrett said he’s not sure that the wells have actually sustained that much damage, but it’s one of many unknowns that could impede the oil market’s comeback.
“There’s some optimism today that we’re closer to the war ending,” he said. “I don’t think you can snap your fingers and magically things go back to normal.”
Write to Avi Salzman at avi.salzman@barrons.com
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