Several factors are shielding oil prices from the extensive supply disruptions caused by the Middle East conflict; however, an "inevitable market reckoning" is coming, through higher prices or product shortages, according to a Monday report by ANZ Research.
In physical markets, there have been few signs of an oil supply crisis, particularly in the US, where commercial crude oil stocks stand at 456,000 barrels in the week ending April 24, which is 24,000 barrels higher than at the same period a year ago.
High inventory levels in Asia have also helped buffer supply losses, with China's crude oil reserves estimated to be around 1.7 billion barrels. This has been aided by demand rationing and strategic reserve releases.
Overall, oil production from the Persian Gulf fell by 10.7 million barrels per day over the February-March period. Over 15 million barrels per day are being held off the market, and cumulative losses are approaching 1 billion barrels. Global crude oil inventories fell by nearly 200 million barrels in April, and the June quarter will see the largest quarterly crude inventory drawdown in history at 6.5 million barrels per day.
The bank's global oil market balance shows a deficit of 1.6 million barrels per day for 2026, which assumes rising supply and weak demand in the December quarter. Its outlook for supply is based on a gradual recovery starting in June and progressing through to the end of the year. Under this scenario, damage to supply will linger, with the recovery in Persian Gulf supply being asymmetric.
If the supply crunch starts to ease in the second half of the year, both in terms of flows through the strait and the restart of upstream production, the ongoing threat of a sudden closure of the strait would keep a geopolitical risk premium embedded in prices, which would keep Brent crude oil above $90 per barrel for the remainder of the year and elevated prices would remain a feature of the oil market into 2027.
If the conflict persists and supplies remain disrupted, prices would likely surge towards $200 per barrel. If the US and Iran reach a peace deal, and the Strait of Hormuz is reopened, Brent crude could fall to around $83 per barrel to $87 per barrel.