Following the agreement between the United States and Iran to end the war started by Trump on February 28, Brent futures have fallen by around 30% since the peak of the crisis, settling around $80, around $10 above the level at the end of February. WTI fell to around $78. However, with several key issues seemingly unresolved, caution prevails. “Don’t expect a return to pre-war levels anytime soon,” warned Allen Good, director of equity research at Morningstar. “Shipments will still take time to reach the market, while inventories will need to be replenished. This will likely set a higher floor for oil prices than before the war, when markets were pricing in an expectation of oversupply in 2026.”
Divergent production forecasts
According to Morningstar’s Good, assuming a rapid reopening of the Strait of Hormuz, which carries about a fifth of the world’s seaborne oil and gas, exports could quickly resume, first from supplies already on board tankers and then from previously halted production: “This should relieve pressure on global supply shortages, which had relied largely on stockpile draws to keep oil prices down.”
Capital Economics is more skeptical, predicting two or three months before production returns to 80% of pre-war levels, with prices expected at the end of the year at current levels, albeit with a possible increase in the short term. “I wouldn’t rule out an oil price rally in the near term,” says David Oxley, chief climate and commodities economist at Capital Economics, who said energy markets may have sold off prematurely earlier in the week: “The push to rebuild inventories could prevent oil prices from falling further than they might have.”
LNG will recover more slowly
The European benchmark price for natural gas, the Dutch TTF futures contract, stood at around 42 euros per megawatt hour on Tuesday, about 12 euros above pre-war levels. Capital Economics, however, expects a new increase in winter, with average prices around 55 euros/MWh. “The LNG market will have more scars in the coming months,” Oxley says, adding that it could take several years for production to normalize. The forecasts follow warnings from Qatar in March that Iranian attacks would wipe out 17% of its LNG capacity for up to five years, although there are indications that the country aims to restore most of its export capacity within two months.
What happens if the deal falls through
Key risks to a rapid recovery of oil flows include the possible presence of mines in the Strait, a renewed closure of the route by Iran and a broader return to hostilities in the region. “If it fails, markets could expect a return to the current situation, with some volumes continuing to flow out of the Strait, but at much lower levels than before the war and a continued reliance on supplies. This is unsustainable, and with supplies already quite low, prices would likely rise much more to stimulate the necessary demand response,” Good concluded.
