Oil prices may keep testing higher ranges as Strait of Hormuz risks and depleted inventories limit market relief, RBC Capital Markets said in a Wednesday note.
RBC said the market faces two major uncertainties: the timing of Strait of Hormuz and Bab el-Mandeb reopenings and China's crude demand.
The bank said headline-driven volatility has created significant uncertainty, while physical prices have generally offered a better read on conditions at sea than paper markets.
RBC said crude prices should eventually move below this year's elevated levels if flows normalize, but sustained lower prices require consistently higher Strait traffic.
The bank said post-conflict prices could still settle above pre-conflict expectations, citing deferred demand, inventory rebuilding, geopolitical premiums, higher insurance costs and lingering infrastructure damage.
RBC said re-escalation could again restrict flows through the Strait of Hormuz and Red Sea while depleted commercial inventories and limited strategic stockpiles leave markets with fewer buffers.
The bank outlined three scenarios, with the low case assuming full flow normalization, the middle case reflecting a conflict that lingers through 2026, and the high case extending Gulf supply restrictions into 2027.
Under the low scenario, RBC expects Brent to average $83.85 per barrel and WTI to average $79.10/bbl in 2026, falling to $72.94/bbl and $68.44/bbl in 2027.
RBC's middle scenario assumes the Iran conflict remains in place during 2026, with Brent averaging $89.91/bbl and WTI $85.38/bbl that year, before easing to $87.67/bbl and $83.16/bbl in 2027.
The high scenario assumes Gulf supply remains restricted into 2027, with RBC forecasting Brent at $96.49/bbl and WTI at $92.17/bbl in 2026, rising to $121/bbl and $117.50/bbl in 2027.
RBC said prices could exceed its high scenario under even worse conditions, while each re-escalation would occur against an increasingly depleted inventory backdrop.
Cushing inventories stand around 21 million barrels after recovering above their typical floor, while the US Strategic Petroleum Reserve holds about 305 million barrels.
The US Strategic Petroleum Reserve remains just above RBC's 300 million-barrel constraint level and at its lowest since March 1983, while the post-memorandum inventory cover benefit may expire by summer-end.
Before the conflict, the Strait of Hormuz handled more than 100 daily transits, but traffic has recently averaged only 12 per day, despite reaching 9.6 million b/d during the memorandum period.
RBC said the Red Sea and Bab el-Mandeb have also become caught up in the conflict, while Red Sea transits had already remained more than 50% below pre-2023 levels.
China's crude imports and refinery runs fell by about 4.6 million b/d and 3.3 million b/d, respectively, in July versus February as it entered "eco mode."
RBC said it does not view China's eco mode as a permanent structural change, adding that crude stocks could resume moving toward 1.8 billion barrels as imports and throughput recover.
RBC said Middle East supply recovery has become the oil market's biggest uncertainty, while North American producers remain disciplined and Brazil and Guyana continue adding new capacity.
Even if the conflict ends soon, RBC expects Middle East output to take months to recover, with some facilities facing lasting damage. RBC caps Strait flows at 50% below pre-war levels in its scenarios.
RBC expects oil demand to recover as conflict-related activity cuts fade, while post-conflict stockpiling and efforts to rebuild US strategic reserves and increase inventory cover should create a firmer floor for crude prices.