Oil Prices Retreat While the 2026 Supply Deficit Doubles, Suggesting Supply Risks Remain Underpriced

• Oil fell for a third straight session to one-week lows after the US paused strikes on Iran, pushing Brent and WTI down between 2% and 2.7% intraday despite forecasts that the Middle East conflict has widened the 2026 supply deficit.
• Hormuz crude and refined product exports fell to 2.9 million barrels a day from 5.9 million the previous week, while Persian Gulf oil flows remained at 41% of prewar levels, suggesting the recent oil price decline may understate ongoing supply tightness.
• A Reuters poll doubled the 2026 oil deficit forecast to 1.5 million barrels a day from a prewar expectation of a 1.63 million barrel surplus, suggesting current price weakness may not fully reflect tighter supply before the market shifts to a projected 2027 surplus.
• OPEC+ is likely to raise its September output target by about 188,000 barrels a day, but June production remained at 36.28 million barrels a day, well below the nearly 43 million barrels produced before the war, leaving global supply below prewar levels despite higher quotas.
• S&P Global modeled a comparable energy shock raising the global iron ore cost base by 11.3%, while integrated miners with owned shipping and energy hedges faced lower cost increases than independent producers, strengthening their competitive position during higher energy prices.

Iran De-escalation Pushes Oil Lower & Markets Remove the Geopolitical Risk Premium

Oil extended its slide Tuesday as prices weakened throughout the session. Brent fell from $87.86 a barrel and WTI from $82.24 early in the session to $86.31 and $80.93, respectively, before declining further to $85.95 and $80.81 by afternoon, even as physical supply disruptions continued to support a tighter medium-term outlook.

Both benchmarks fell about 8% to their lowest levels since July 20 after the US suspended its air-strike campaign against Iran, reducing the geopolitical risk premium. Trump said the US was holding good-faith talks with Iran but warned strikes would resume if negotiations failed, leaving room for oil prices to recover if supply risks re-emerge.

Hormuz Flows Stay at 41% of Prewar Levels & Suggest Oil Supply Remains Tighter Than Prices Imply

Persian Gulf oil flows remained at 41% of prewar levels, while Red Sea shipments fell by more than 3 million barrels a day over the past week as Saudi Arabia rerouted exports through the Suez Canal and Russia cut its Red Sea shipments, keeping regional oil flows constrained despite weaker oil prices. Hormuz crude and refined product exports averaged 2.9 million barrels a day, down from 5.9 million the previous week, suggesting the recent selloff may not fully reflect ongoing supply tightness.

Saudi Arabia said it intercepted drones targeting petroleum facilities near Riyadh launched by Iran-backed groups from Iraq. Houthi forces also claimed an attack on the East-West Pipeline to Yanbu, underscoring risks to Red Sea oil exports and the potential for renewed supply disruptions.

Middle East Disruptions Widen the 2026 Oil Deficit & Leave the Supply Outlook Stronger Than Prices Suggest

IG analyst Tony Sycamore said diplomatic progress reduced oil prices and eased concerns over Houthi attacks on Saudi infrastructure but cautioned the situation remains fluid. Marex analyst Edward Meir said weaker Asian demand has offset supply disruptions even as Red Sea and Hormuz traffic remains significantly lower, suggesting prices may still understate risks to global oil flows.

If Hormuz fully reopens, Brent could moderate to $80 a barrel by year-end, in line with Goldman Sachs' target. Continued Red Sea attacks, however, would support a 2026 oil deficit of 1.5 million barrels a day, double the April forecast and reversing the prewar expectation of a 1.63 million barrel surplus, limiting downside if supply disruptions persist.

Energy Shock Raises Iron Ore Costs by 11.3% & Strengthens Integrated Miners' Cost Advantage

Tuesday's price decline suggests the market is pricing in a resolution to the crisis. A Reuters analyst poll doubled the 2026 oil deficit forecast to 1.5 million barrels a day because of the war, suggesting prices may not fully reflect tighter supply.

Retail diesel averaged $5.134 a gallon on July 20, up $0.338 on the week and $1.322 year over year, suggesting physical fuel markets remain tighter than the recent decline in oil futures implies.

S&P Global Market Intelligence modeled a comparable Middle East disruption raising the global iron ore cost base from $50.81 to $56.57 per dry metric ton, an 11.3% increase, with diesel alone adding $1.54 per ton. The same modeling showed producers with owned shipping and energy hedges absorb less of the cost increase than independent operators, strengthening their competitive position despite higher energy prices.

188,000-Barrel-a-Day OPEC+ Increase Tests Whether Higher Quotas Narrow the Supply Gap

CBA economist John Oh said the US has paused strikes on Iran for a third consecutive night while Iran has refrained from retaliation, leaving Brent in the high $80s and WTI in the low $80s despite ongoing risks to regional oil supply.

A resumption of US strikes remains the key upside risk if talks fail, as Trump has said. Both benchmarks fell about 8% in a single session when the pause began, highlighting the potential for an equally sharp rebound if geopolitical tensions escalate again.

The next catalysts are OPEC+'s August 2 meeting and the EIA's Weekly Petroleum Status Report for the week ended July 24. OPEC+ is expected to raise September output by about 188,000 barrels a day, but June production remained at 36.28 million barrels a day versus nearly 43 million before the war, suggesting supply could remain constrained despite higher quotas.