The US and Iran have reached a framework agreement to extend the current ceasefire by 60 days and reopen the Strait of Hormuz to shipping, with a signing ceremony scheduled for this Friday in Switzerland. The pact paves the way for a gradual resumption of energy exports from the Gulf region, triggering an immediate relief rally in oil markets. Brent crude slipped below $80 per barrel, trading more than $20 lower than just over a week ago.
Supply Upside Potential
Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank AG, notes that several Gulf producers are well-positioned to increase output beyond pre-war levels in the medium to long term. OPEC members had already begun unwinding voluntary production cuts, with eight members restarting the reversal of the last tranche of 1.65 million barrels per day in April. Since then, they have agreed to increase production by a theoretical 600,000 barrels per day, with an additional 188,000 barrels per day already agreed for July. The exit of the United Arab Emirates from OPEC further removes production restrictions for one of the countries with substantial spare capacity.
Constraints on Full Capacity Utilisation
Despite the large potential, Nguyen stresses that countries are unlikely to fully utilise their spare capacity. Russia’s recent production increases were partly enabled by eased US sanctions, which Washington is unlikely to maintain once Gulf supplies normalise. Saudi Arabia, holding the largest spare capacity, has a strong interest in keeping oil prices at levels that support its budget. Additionally, producers prefer to retain some buffer for unforeseen supply outages.
Inventory Rebuilding to Offset Supply
A major offsetting factor will be robust demand from inventory restocking. OECD commercial oil inventories have already declined sharply, standing at just over 2.6 billion barrels by the end of May, down around 180 million barrels since the end of February. Nguyen expects inventories to continue falling in the coming months, though at a slower pace than previously forecast. The EIA projects OECD stocks could drop below 2.3 billion barrels by year-end, followed by average monthly builds of 25 million barrels throughout 2027. Some countries, like Kuwait, are even considering building strategic stocks outside the Gulf region, which could further boost short-term demand.
Cautious Price Outlook
Given these dynamics, Commerzbank maintains a relatively supportive price forecast, expecting Brent to average $85 per barrel by the end of this year. A return toward pre-war levels around $65 per barrel is only likely next year. Nguyen notes that from the current level of demand, this would result in a substantial excess supply, which could push the oil price significantly lower and, above all, below pre-war levels, while adding important caveats about realistic utilisation rates and restocking demand.
Diplomatic and Logistical Hurdles
The framework agreement still faces challenges. Nguyen expects further negotiations on a comprehensive nuclear deal to be “extremely bumpy,” meaning any extension of the current accord could repeatedly come under question. Even in the best-case scenario of a sustainable reopening, logistical hurdles, including demining, vessel repositioning, and infrastructure repairs, mean that full normalisation of shipping traffic and energy exports will take considerable time.
The oil market is transitioning from a severe supply-constrained environment to one of gradual abundance. While spare capacity across OPEC+ and non-OPEC producers could theoretically add millions of barrels per day, strategic, economic, and practical constraints suggest a more measured increase. This balanced outlook, rising supply tempered by restocking demand and producer discipline, supports Commerzbank’s view that prices will ease gradually rather than collapse. For related market moves, see AtaiBeckley Surges 115% on Eli Lilly's $3.8B Acquisition Deal and Dell Stock Stalls After AI-Driven Surge: Valuation and Technicals Signal Risk.
This article is for informational purposes only and does not constitute financial advice.
