Oil markets adjust as geopolitical risk eases

Key takeaways:

• The latest progress toward an agreement involving Iran has helped ease geopolitical risk in oil markets, although the negotiation process remains fragile.

• Energy markets have already adapted to the disruption through greater use of alternative routes, including pipelines through Saudi Arabia and the UAE, as well as more flexible refining operations.

• The shock could make global oil and gas markets more diversified, more resilient and less vulnerable to future disruptions.

• Once normal flows resume through the Strait of Hormuz, oil markets may return to oversupply, with a potential surplus of more than 1 million barrels per day in 2027.

• Oil prices could face further downward pressure in 2027, although China’s strategic stockpiling remains an important uncertainty.

• China has played an important role in absorbing surplus crude by rebuilding strategic inventories when prices were low, but the size of its storage capacity remains unclear.

• The global economy is less oil intensive than it was during the oil crises of the 1970s, helping explain why prices did not rise to comparable levels despite the scale of the disruption.

• The crisis may reinforce efficiency gains and raise the possibility that global oil demand has already peaked, although this remains uncertain.