06/23/2026
The Outlook for the Oil Market
USAEE NEWSLETTER | SUMMER 2026
BY MICHAEL C. LYNCH
This is my inaugural column for the USAEE newsletter on petroleum markets, and it will begin with some background thoughts on analyzing and forecasting the market to set the stage for readers who might be less familiar with the subject. Recent psychological research suggests that people prefer certainty when looking for opinions, which resembles President Truman’s remark that he wanted a one-handed economist because they were always saying, “On the other hand….” Unfortunately, when it comes to oil markets, there are a large number of contingent developments that are uncertain but consequential, meaning any forecaster will have many hands to consider.
Demand for opinions about the oil market is very high, especially now that prices are elevated, which has the pernicious effect of increasing the supply of opinions but moving to lower-grade ore, so to speak. There are numerous analysts in industry, academia and government whose work is detailed and rigorous, but there are also huge numbers of people ready to offer an opinion based largely on a casual reading of the media, both legacy and modern.
Further, many of those writing about the oil market have particular biases, usually towards predicting higher prices. This reflects a combination of psychology and personal preferences: purveyors of oil securities or energy that competes with oil prefer higher prices, while oil company managers might prefer a lower price forecast to encourage cost-consciousness. Some analysts seem to always predict higher or lower oil prices, regardless of the current level or market condition; be advised that my bias is towards lower prices.
The rise of modern quantitative economics and the spread of easy to use statistical tools would seem to imply that modeling the oil market has become more scientific and reliable but that overstates the case. Although the basic economic principles, such as that higher prices reduce demand, are valid, they cannot predict with any precision the major market determinants. Aside from fluctuations in factors like interest rates, economic growth, weather, refinery and oil field maintenance, intangibles like OPEC decisions, threatened supply disruptions and simple trader psychology can drive the short-term market.
It is also somewhat perverse that the short-term market is harder to predict than the market beyond a few years. The long-term market is driven primarily by economic growth which drives demand and the marginal cost of supply, which admittedly depends on political decisions about investment. But the long-term average annual price can be expected to usually fall within historical ranges, primarily diverging from them due to supply disruptions, whereas short-term prices can vary enormously, from $12 in 1998 to $140 in 2008.
For its part, the short-term price is subject not just to daily, monthly and quarterly fluctuations in economic growth, weather and so forth, but suffers from data lag—which hardly effects long-term trends. Additionally, expectations about economic growth and OPEC production decisions can move prices as much as current conditions. That said, possible political events can be discussed in the context of market fundamentals, and where we could go from here.
The present outlook is dominated by the closure of the Straits of Hormuz through which 20 million barrels a day (mb/d) of oil previously traveled. Although pipelines have taken up some of the slack, the market still faces a loss of over 10 mb/d. This has been made up partly by a combination of releases from government-held stocks by IEA members and the relaxation of sanctions on Russian oil. Similarly, China has reduced its imports of oil by as much as 4 mb/d, apparently relying on the government’s reported 400 million barrels of strategic stocks.
Even so, oil stocks are declining sharply, with OECD stocks dropping by an estimated 146 million barrels in April of which about 40% was from government strategic inventories. Going into the war, there were an estimated 1 billion barrels of oil in OECD-government strategic inventories, and the IEA called for the release of 400 million barrels over about six months. One-quarter of that would not be physical releases but reductions in required minimum inventories, but there is no guarantee that oil will enter the market instead of being hoarded by the companies. Given the current uncertainty, most companies seem likely to simply hold onto their supplies.
Further, much of the industry’s inventories are not available for use, as minimum operating levels mean stocks can’t drop below a certain amount. Thus, while global inventories are large, it would seem that the industry will shortly experience operational difficulties as inventory levels approach the minimums in places.
At present, demand appears to be weakening as consumers respond to higher prices, governments encourage conservation, and the global economy seems to be slowing, even if only slightly. However, the possibility that lower demand will make more than a moderate contribution to balancing the market appears remote: in the 2008 financial crisis, global demand dropped by about 3 mb/d, and that over more than a year’s time.
The EIA’s Short-Term Energy Outlook has taken a fairly optimistic view of the market, mainly by assuming OPEC production is restored in the near-term, as the figure below shows. The implication of this forecast is that prices will be under pressure sometime next year as supply once again outpaces demand. The longer it takes for the Straits to reopen, the later the market rebalancing will occur as inventories take longer to rebuild to normal levels.
EIA Market Forecast (mb/d)
Source: EIA Short-term Energy Outlook.
Going forward, the operative questions are:
When are the Straits reopened? Partially or fully?
How quickly will production in the Gulf return to prewar levels?
Will the IEA release more oil from strategic stocks? Will China?
Will sanctions on some Russian oil continue to be waived past June 17th?
Aside from temporary fluctuations, prices are unlikely to decline as long as the Straits are constricted, and if that situation continues, commercial inventories should be so low by mid-summer that prices will increase sharply. Theoretically, there is no ceiling on the price that might be reached—markets are still one-third below the 2008 highs—but in reality, if traders feel they have peaked, especially if negotiations appear to be proceeding successfully, they will sell off. A roller coaster is thus likely this summer absent Iran and the U.S. reaching a conclusive agreement.
Once the Straits reopen, prices should plummet towards but not to pre-war levels. It will take weeks for tankers stuck in the Gulf to reach consumers and for new shipping to arrive in the Gulf. Initially, oil stored on-land in the Gulf will fill new tankers even as production remains below pre-war levels: there is an estimated 120 million barrels stored in Saudi Arabia and the U.A.E. but that will be depleted in weeks.
Ultimately, the remaining uncertainty revolves around the ability of Gulf producers to restore production. Some have argued that field shut-ins can result in damage that requires substantial remediation, but this effect appears to be exaggerated. The Saudis, for instance, have repeatedly managed to raise production rapidly without additional investment as the figure below shows.
Saudi Monthly Production During the Two Gulf Wars (tb/d)
Source: EIA.
By the time this is published, prices could have soared or dropped entirely based on what happens in the Persian Gulf. Longer term, the recent crisis will mean some permanent loss of demand as consumers buy electric vehicles in response to higher prices—and fears of future disruptions. But there is no reason to expect that, post-war, the market will not be restored to balance and prices return to pre-war levels, even if over the course of months.
Longer term, much depends on whether sanctions on Iran and/or Russia are relaxed and, crucially, the degree of resource nationalism which has restrained upstream investment in recent years. Moves by some nations such as Mexico and Venezuela suggest that the industry will face a more welcoming political environment, which should moderate prices. But as always, the potential for political disruptions of supply, some lasting, could keep them elevated.
Michael C. Lynch is the president of Strategic Energy & Economic Research and is a distinguished fellow at the Energy Policy Research Institute.