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New Delhi: Geopolitics have been a major influence on oil prices for some time now, but the past history of oil indicates that supply/demand fundamentals typically take over when the immediate disruptions subside. That scenario seems to be playing out once more as energy markets shift away from the Middle East tensions of recent weeks and focus their attention back on inventories, demand and production.
Citigroup expects oil prices to fall back to about $60 per barrel by the end of 2026, as it believes the geopolitical premium embodied in prices during the Strait of Hormuz crisis is eroding. The bank thinks that as shipping routes return to normal and physical oil markets deteriorate, crude prices are set to face new challenges.
The Strait of Hormuz is one of the world’s most critical energy chokepoints, connecting the Persian Gulf to global shipping routes. The U.S. Energy Information Administration (EIA) estimates that about 20 million barrels of crude oil and petroleum products flow through the strait every day, accounting for nearly 20% of global petroleum liquids consumption. Any disruption in this route usually has immediate repercussions on global energy prices, freight costs and energy security.
Citi maintains in a research note co-led by analyst Francesco Martoccia that market fundamentals are “rapidly reasserting themselves.” The bank pointed to several factors that have contributed to its bearish sentiment, ranging from the return to normal of shipping traffic through the Strait of Hormuz, softer physical crude markets, lower buying interest from China, and less-than-expected inventory reductions.
In addition, the bank added that commerce via shipping is also returning to the normal pace after the recent conflict between the United States and Iran. Organised navigation patterns have returned, indicating that shipping companies are now finding the region more manageable than they did at the time of the pandemic. Insurers and logistics providers are still adapting to the new environment, and the return of organised navigation patterns has helped shipping companies believe the region is less risky than at the height of the crisis.
Brent crude already has given up a significant portion of the premium in prices that it had accrued during the conflict. The global benchmark was briefly trading at above $72 per barrel in early July after fears of supply disruptions but has since stabilised at just over $72 per barrel. Citi now believes prices will gradually move towards the $60-$65 per barrel range by the end of the year and recommends that investors consider short-term summer rallies as selling opportunities.
The most striking thing is that Citi is not the only bank to have taken a conservative stance. A number of major investment banks have lowered their oil forecasts in recent weeks as geopolitical uncertainty has eased.
Goldman Sachs said the global oil market is likely to return to surplus as oil supply conditions improve and exports through the Strait of Hormuz recover. Morgan Stanley has also cut its oil price forecasts twice in recent weeks, citing concerns over a growing supply glut.
In addition to geopolitics, demand growth is also slowing. The International Energy Agency (IEA) predicts that global oil demand growth will slow significantly in 2026, driven by weaker global economic growth and improving energy efficiency. Meanwhile, both OPEC+ and non-OPEC producers continue to maintain relatively strong production levels, keeping the market balanced—or potentially oversupplied.
The recent increase in market confidence has been further supported by the easing of tensions between the United States and Iran. Both countries have agreed to a memorandum of understanding (MoU) aimed at pausing hostilities while negotiations continue towards a broader agreement. Citi believes the incentives for de-escalation remain stronger than those for renewed conflict, reducing the likelihood of another major supply shock in the near term.
Indeed, this reflects a broader shift in market risk pricing. Crude prices often spike sharply during periods of geopolitical instability because of concerns over supply disruptions. However, once those concerns ease, the market typically returns its focus to inventory levels, refinery demand, production growth and broader macroeconomic conditions, which ultimately determine long-term price trends.
Lower crude prices could have significant implications for major oil-importing economies such as India. India is the world’s third-largest importer and consumer of crude oil, importing nearly 85% of its crude oil requirements. A sustained decline in Brent crude prices could reduce India’s import bill, ease inflationary pressures, and lower costs across sectors including transportation and manufacturing.
However, for oil-exporting countries and upstream energy companies, lower crude prices could weigh on revenues and investment decisions. If oversupply continues to build, producers may need to adopt greater production discipline and coordinated output management to prevent a sharper decline in prices.
Geopolitical developments will continue to influence short-term market sentiment, but the latest forecasts suggest that the oil market is gradually returning to a phase where fundamental supply-and-demand dynamics, rather than conflict-driven disruptions, are likely to determine price movements over the coming months.
English (US) ·