Oil Prices Fall as Strait of Hormuz Reopens: 2026 Update

Global oil markets are unwinding one of the sharpest supply shocks in decades as tanker traffic resumes through the Strait of Hormuz following a US-Iran memorandum of understanding, with the US Energy Information Administration sharply cutting its price forecasts even as a fresh flare-up of hostilities in early July underscored how fragile the de-escalation remains.

Prices Fall Fast From Their Peak

The Brent crude spot price averaged $85 per barrel in June, down $22 from May and a full $32 below the April 2026 peak, before falling below $70 a barrel on 1 July — roughly back to levels last seen when the conflict began in late February, according to the US Energy Information Administration’s July Short-Term Energy Outlook. The reversal followed a memorandum of understanding signed by the United States and Iran on 18 June to end hostilities and reopen the strait, which had been effectively closed since 28 February.

The EIA has responded by sharply revising its forecasts lower, now expecting Brent to average $74 a barrel in the third quarter of 2026 — $27 below its prior month’s forecast — with prices sliding further to an average of $65 in 2027 as continued inventory builds push the market into surplus. Crude oil output and trade flows are expected to return to near pre-conflict levels by year-end, with most shut-in production restored by early 2027.

Supply Rebounded Sharply, But Remains Below Pre-War Levels

Global oil supply rebounded by 4.1 million barrels per day to 98.8 million barrels per day in June as Gulf production partially recovered, though total output remained roughly 9.4 million barrels per day below pre-war levels, according to the International Energy Agency’s July Oil Market Report. Refined product cracks and margins surged to four-year highs in early July even as crude prices fell, reflecting continued tightness in refined fuel markets — a reminder that easing crude prices do not immediately translate into cheaper diesel or jet fuel.

A Chokepoint That Cannot Easily Be Replaced

The scale of what was briefly disrupted is difficult to overstate. Roughly a quarter of the world’s seaborne oil trade and nearly 20% of global liquefied natural gas trade normally passes through the 21-mile-wide strait, bound largely for major Asian economies including China, India, Japan, and South Korea, according to analysis published by the University of Wisconsin Law School. At the height of the disruption, tanker traffic through the strait plunged by roughly 90% as shippers suspended transit amid insurance withdrawals and direct Iranian threats to commercial vessels — a shutdown most Gulf producers other than Saudi Arabia and the UAE have no practical pipeline alternative to absorb.

Volatility Has Not Fully Disappeared

The recovery has not been linear. Brent crude jumped more than 4% in mid-July as the US and Iran traded fresh attacks over control of the waterway, extending a 9.6% two-day gain that pushed prices to a one-month high near $86 a barrel, according to Al Jazeera. That episode illustrated how quickly the market’s improved footing can reverse, and why analysts continue to flag the risk of renewed escalation as the single biggest wildcard for the second half of 2026.

Why This Matters Across Every Market

The oil-price swing has been the connective macro thread running through this year’s coverage of markets from the UK (where gilt yields spiked on energy-driven inflation fears) to Dubai (where trade and banking data have proven resilient despite renewed volatility) to Pakistan (where fuel and fertiliser costs have compounded flood-driven food inflation). The EIA’s downward price revision offers relief to energy-importing economies across Asia and Europe, but the events of early July are a reminder that the underlying geopolitical settlement remains fragile rather than final.

What to Watch

The EIA’s next Short-Term Energy Outlook, due 11 August, will be the first full month of data reflecting whether the June memorandum of understanding is holding or eroding. Markets will also be watching for any further flare-ups around the strait, as well as the pace at which shut-in Gulf production capacity is restored heading into 2027.