Two contradictory forces are shaping the 2026 oil market simultaneously: a structural glut large enough to keep prices depressed for years, and a live geopolitical risk premium large enough to send prices toward levels not seen in over a decade. Both are true at once, and understanding why matters for anyone pricing energy, currency, or emerging-market risk this year.

The Oversupply Case

The consensus view among major forecasters is bearish. The IEA has projected a 2026 surplus of up to 4.09 million barrels per day, later revising it slightly down to 3.84 million barrels per day as sanctions on Russian and Venezuelan supply offset some of the glut, according to Forex.com’s 2026 outlook. Goldman Sachs has forecast Brent averaging $56 per barrel and WTI $52 in 2026, driven by long-delayed pandemic-era projects coming online in clusters alongside OPEC+’s gradual unwinding of production cuts, per coverage from iTiger. The bank has flagged Brent could fall into the $40 range if non-OPEC supply proves more resilient than expected or a recession hits in 2026-2027.

EBC Financial Group’s analysis similarly expects Brent to average $58-60, with the IMF projecting global growth of 3.3% for 2026 — a supportive but not booming demand backdrop. Crucially, forecasters diverge sharply on demand growth itself: the IEA projects roughly 930,000 barrels per day of additional 2026 demand, while OPEC is far more bullish at 1.4 million barrels per day — a gap that alone could determine whether the market tightens faster than consensus expects.

The Geopolitical Premium

Layered on top of that oversupply is acute conflict risk. The 2026 U.S.-Israeli military conflict with Iran and the effective closure of the Strait of Hormuz triggered what one analysis calls a “historic geopolitical supply shock” against the oversupply backdrop, according to Just2Trade’s market review. The IMF has characterized an “adverse scenario” of 2.5% global growth and 5.4% inflation as a live operating risk, warning that prolonged conflict with oil near $125 a barrel could de-anchor global inflation expectations entirely. Notably, oil and equity markets have diverged during the crisis — Brent fell sharply during a late-May ceasefire period even as equities rallied, illustrating how regime-dependent the correlation between crude and financial markets has become.

Setting Up the Next Shortage

Perhaps the most underreported angle is the setup for what comes after 2026. Lower prices are already deferring investment, particularly in U.S. shale — the EIA forecasts flat 2026 output with potential declines if prices stay below $60, according to Fort Worth Inc.’s analysis of Saxo Bank data. Goldman Sachs projects prices could rebound toward $80/$76 (Brent/WTI) by end-2028 specifically because low 2025-2026 prices will curb non-OPEC supply growth while minimal new long-cycle projects come online post-2026, following roughly 15 years of underinvestment.

Who This Hits Hardest

The oversupply-plus-risk-premium combination lands unevenly. Producers with high fiscal breakeven prices and limited buffers — Russia chief among them, whose Q1 2026 oil and gas revenue collapsed 45% year-on-year — are exposed on the downside even as they occasionally benefit from conflict-driven price spikes. Gulf producers, by contrast, are using current elevated-but-volatile pricing to accelerate diversification of their sovereign wealth into non-oil assets, a hedge against exactly this kind of structural oversupply persisting into the 2030s.

On July 15, 2026, during a routine Chinese foreign ministry press briefing, spokesperson comments took on unusual significance for global energy and trade watchers: Beijing strongly criticized recent US sanctions measures affecting Cuba and, more consequentially, proposed US legislation specifically targeting major purchasers of Russian energy, according to sanctions-tracking analysis from law firm Steptoe. The pairing of Cuba sanctions criticism with concern over Russian-energy-buyer legislation is not coincidental — both represent the kind of secondary sanctions architecture that could eventually be extended to reach China’s own energy trade.

Why China has reason to be worried

China has emerged as one of the largest buyers of discounted Russian crude since 2022, alongside India, as Moscow redirected exports away from European markets closed off by sanctions. That trading relationship has functioned largely outside direct US sanctions exposure because existing measures have focused on Russian entities, vessels, and price-cap compliance rather than directly penalizing the buying countries themselves. Proposed legislation targeting “major purchasers of Russian energy” would represent a meaningful escalation — shifting from supply-side sanctions on Russia to demand-side sanctions on Russia’s customers, a category in which China is unambiguously the largest player.

The broader sanctions context this fits into

This is not an isolated legislative proposal. The EU Council has separately been expanding its own sanctions lists to include entities active in Russia’s energy sector, specifically firms producing automated control systems for oil and gas infrastructure — a sector the EU explicitly identifies as a substantial source of Russian government revenue, with designated entities subject to asset freezes and travel bans. That EU action, combined with the US legislative proposal China is objecting to, suggests a coordinated Western push in mid-2026 toward tightening the demand side of Russian energy sanctions after several years of focusing primarily on supply-side measures — price caps, shipping insurance restrictions, and tanker interdiction — that CREA’s own monthly tracking has repeatedly shown to be only partially effective.

Why demand-side sanctions would be harder for China to absorb than supply-side measures

China’s exposure to a demand-side sanctions regime differs meaningfully from Russia’s own exposure to supply-side measures. Russia has adapted to supply-side sanctions through shadow-fleet shipping, price discounting, and using non-sanctioned intermediary buyers — mechanisms that work precisely because the penalty falls on specific vessels, entities, or transactions rather than on the buying country’s broader economy. A US measure targeting “major purchasers” as a category would be far harder for China to route around through the kind of intermediary and shadow-fleet workarounds Russia itself has relied on, since it would target China’s status as a buyer directly rather than any specific transaction or vessel.

The timing question: why July 2026 specifically

The proposed legislation surfaces at a moment when Russian oil revenues are themselves in flux — recovering somewhat due to the Iran-war-driven price spike after falling to some of their lowest levels since the 2022 invasion earlier in 2026. A US Congress moving to tighten sanctions on Russia’s energy customers at precisely the moment Iran-war-driven prices are already inflating Russian oil revenue suggests lawmakers are attempting to prevent Moscow’s accidental windfall from becoming a durable financing lifeline — a goal that requires closing the demand-side gap that has persisted throughout the supply-side sanctions era to date.

What China’s public criticism signals diplomatically

Beijing’s decision to criticize the proposal publicly, rather than simply lobbying against it through diplomatic channels, is itself a signal. Chinese foreign ministry statements on sanctions issues are typically measured and procedural; explicit public criticism paired with a separate objection to Cuba sanctions suggests Beijing is framing this as part of a broader pattern of what it characterizes as unilateral US extraterritorial sanctions overreach, a framing China has used consistently in disputes over technology export controls and is now extending to energy trade.

What comes next

The practical test will be whether the proposed legislation advances through Congress with enough bipartisan and administration support to become binding policy, or whether it remains a negotiating lever — a credible threat used to extract concessions from China on other fronts (trade, technology, Taiwan) without ever being formally enacted. Given the scale of China’s Russian energy imports and the diplomatic and economic disruption a genuine demand-side sanctions regime would cause, most sanctions analysts view near-term full enactment as unlikely, though the legislative threat itself already appears to be shaping Chinese diplomatic posture.

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.