Oil outlook shifts as Hormuz flows recover and Citi sees brent falling to $65

Oil market moves away from peak disruption fears

The oil market is starting to price a calmer supply outlook as tanker traffic through the Strait of Hormuz improves, but the recovery remains incomplete.

The latest IEA monthly report showed global oil supply rose by 4.1 million barrels per day in June as flows through Hormuz resumed after recent disruption. That rebound is significant because the strait remains one of the most important energy transit routes in the world and has been at the center of the oil market’s geopolitical risk premium.

Still, the recovery does not mean the market has fully normalized. Global production remained 9.4 million barrels per day below pre-war levels, showing that the conflict continues to leave a major supply gap even as transit conditions improve.

That is why oil prices remain sensitive to every headline around US-Iran talks, shipping security and the durability of the reopening.

IEA narrows its 2026 deficit forecast

The IEA slightly reduced its estimate for the 2026 oil market deficit.

The agency now expects total world oil supply to average 860,000 barrels per day below demand in 2026. That is a smaller shortfall than the previous estimate of 920,000 barrels per day.

The adjustment reflects a slightly less severe supply outlook and a slightly smaller demand decline. The IEA now sees global oil demand falling by 1.0 million barrels per day in 2026, compared with its previous forecast for a 1.1 million bpd decline.

On the supply side, the agency expects world oil production to contract by 3.7 million barrels per day in 2026, compared with its earlier forecast for a 3.9 million bpd fall.

The message is that the market remains tight this year, but less tight than previously expected.

2027 could bring a major surplus

The bigger shift appears in the 2027 outlook.

If shipping conditions through the Strait of Hormuz continue to improve, the IEA sees global oil supply rising by 7.5 million barrels per day in 2027. Demand is expected to grow by only around 2.0 million barrels per day.

That gap would create a substantial surplus.

This is the key reason oil markets have calmed after recent spikes. Traders are beginning to look beyond the immediate disruption and ask whether a durable reopening of Hormuz could release enough supply to push the market from deficit toward oversupply.

But the 2027 surplus scenario depends heavily on geopolitics. Renewed escalation in the Middle East could quickly remove that surplus from the outlook by disrupting transit, restricting exports or forcing buyers to rebuild risk premiums.

Citi keeps Brent at $75 for Q3

Citi’s oil forecast also leans toward a gradual easing in prices.

The bank expects Brent crude to average $75 a barrel in the third quarter of 2026, before falling to $70 in the fourth quarter and $65 through 2027.

That path assumes a US-Iran deal eventually materializes and that the Strait of Hormuz reopening becomes more stable. Under that scenario, the recent oil spike would be treated as a temporary geopolitical risk premium rather than the start of a lasting price repricing.

The forecast fits the latest market behavior. Brent recently moved toward $80 during renewed tensions, then slipped back below $73 as traders reassessed the scale of actual supply disruption.

For now, the market appears closer to Citi’s base case than to a full blockade scenario.

Trump’s market sensitivity becomes part of the oil view

Citi’s reasoning includes a political element.

The bank sees President Donald Trump’s preference for strong equity markets and stable bond markets as a factor that could pull Washington back toward negotiations when energy tensions intensify.

This matters because oil, stocks and bond yields have been moving closely together through the conflict. Higher oil prices can lift inflation expectations, pressure bond markets and damage risk appetite in equities. That gives the White House an incentive to avoid a prolonged energy shock if the market reaction becomes severe.

This does not remove geopolitical risk. Trump’s rhetoric has periodically hardened, including threats tied to Iran’s export infrastructure and the possibility of renewed pressure on shipping. But Citi’s base case assumes market pressure ultimately supports a return to diplomacy.

Hormuz remains the key variable

The Strait of Hormuz remains the central driver of the oil outlook.

If transit continues to normalize, the supply risk premium should keep fading. That would likely ease pressure on Brent, flatten the curve and reduce stress in refined product markets.

If the reopening remains conditional or stop-start, prices could stay volatile. Traders would then need to price both physical supply uncertainty and the risk of sudden escalation.

The IEA’s numbers show why this matters. Supply rose sharply in June by 4.1 million barrels per day, yet remained 9.4 million barrels per day below pre-war levels. The direction is improving, but the gap is still large.

That makes the next few weeks critical for whether the market believes in a real normalization or only a temporary pause in disruption.