Crude oil collapse reshapes energy markets as Strait of Hormuz reopens

Energy markets have undergone a dramatic repricing since the US-Iran conflict peaked in April 2026. Brent crude closed at $72/barrel in late July, down from the April peak above $120/bbl. WTI crude is at $68/bbl. The catalyst was the June 18 signing of a Memorandum of Understanding between the United States and Iran to end the conflict and reopen the Strait of Hormuz, through which approximately 20 million barrels per day of crude and petroleum products transit.

The Energy Information Administration's July Short-Term Energy Outlook captures the magnitude of the shift. Global oil inventories, which were drawn down by a massive 5.1 million barrels per day in Q2 2026 as supply from the Middle East was cut off, are now expected to draw by only 2.2 million b/d in Q3. By Q4 2026, the EIA projects inventories will build by 2.7 million b/d, with the market shifting to a 5.0 million b/d build in 2027. That is a textbook oversupply scenario. EIA now forecasts Brent averaging $82/bbl in 2026 and $65/bbl in 2027.

JP Morgan Global Research sees Brent at $86/bbl in Q3, $80 in Q4, and $78 at year-end 2026. The bank notes that the oil market has rebalanced through larger-than-expected demand losses rather than inventory draws. OECD commercial inventories declined materially less than expected, while demand destruction appears substantially larger than first thought. Much of this demand reduction occurred in Asia, where countries were most reliant on Middle Eastern crude imports.

OPEC+ is responding to the new reality. The UAE has vowed to increase production, aiming to expand capacity to 5 million b/d by 2027, roughly 1.5 million barrels higher than current levels. The first surplus is expected to emerge in August 2026 at around 1.2 million b/d as Persian Gulf supply recovers to 90% of pre-war volumes. OPEC+ plans to increase production quotas by 188,000 b/d starting in August.

The natural gas picture diverges from crude. Henry Hub is trading at $2.88/MMBtu, relatively stable as U.S. production remains robust and storage levels are healthy. August futures at $2.908/MMBtu suggest a balanced near-term outlook. LNG markets tell a different story. Asian JKM and European TTF prices remain elevated as the Strait of Hormuz reopening has not yet fully resolved LNG supply chain disruptions. European gas storage is being replenished ahead of winter, but at higher costs.

The jet fuel and diesel markets experienced acute tightness during the conflict period but are now normalizing. ULSD (diesel) premiums over crude have compressed as refinery runs recover and Middle East product exports resume. Gasoline markets face a different dynamic: U.S. summer driving demand is meeting adequate supply, keeping crack spreads in a normal range.

Coal markets are mixed. Newcastle thermal coal prices have eased from war-driven peaks as seaborne supply normalizes. Coking coal remains tighter due to Australian supply constraints and steady steel demand. Methanol prices have corrected alongside crude, with the energy-driven cost curve shifting lower.

The reopening of the Strait of Hormuz represents the single most consequential supply-side event in global oil markets since the pandemic. The waterway handles approximately 20 million barrels per day of crude and petroleum products — roughly 25% of global seaborne oil trade. During the US-Iran conflict that began in late February 2026, traffic through the strait was severely disrupted, with EIA estimating peak production shut-ins of 11.2 million barrels per day in May. The June 18 MOU between the US and Iran began to reverse these disruptions.

The demand destruction during the conflict was substantial and geographically concentrated. The EIA estimates that global oil consumption fell by an average of 1.2 million barrels per day in 2026, with 0.8 million b/d of the decrease coming from non-OECD Asian countries most reliant on Middle Eastern crude imports. High fuel prices, supply shortages, and government rationing programs in affected countries all contributed. However, the EIA expects demand to rebound by 2.0 million b/d in 2027 as supply normalizes and prices moderate.

OPEC+ dynamics are shifting. The group had managed production cuts throughout the conflict period to support prices, but the UAE's unilateral decision to expand capacity to 5 million b/d by 2027 signals growing internal tensions. JP Morgan estimates the first surplus will emerge in August 2026 at 1.2 million b/d. By Q4 2026, the surplus could reach 2.7 million b/d as Persian Gulf supply recovers to near pre-war levels. HSBC notes that OPEC+ would likely consider cutting again only if Brent remains below 5/bbl for a sustained period.

The implications for product markets are significant. Diesel and jet fuel, which experienced acute tightness during the conflict due to refinery disruptions in the Middle East and shipping constraints, are now normalizing. Gasoline crack spreads are compressing as US summer driving demand meets adequate supply. Refinery margins are declining from war-driven peaks, which will eventually reduce refinery runs and provide a floor for crude demand. The normalization of product markets is a key transmission mechanism through which the crude price correction flows to the broader economy.

Natural gas markets present a diverging picture from crude. Henry Hub at .88/MMBtu reflects a well-supplied domestic market with robust production and healthy storage levels. However, international gas markets remain under pressure. Asian LNG spot prices (JKM) and European TTF prices are elevated due to the residual effects of the Strait of Hormuz closure on LNG carrier availability and the ongoing need to replenish European gas storage ahead of winter. This divergence between US and international gas prices has widened the arbitrage opportunity for US LNG exporters, supporting Henry Hub through feedgas demand.