Oil Markets Overcome the 'Hormuz' Shock
Oxford Economics has predicted that global oil markets will gradually adapt to the prolonged disruptions in the Strait of Hormuz, paving the way for easing price pressures, despite ongoing geopolitical uncertainty and the difficulty of reaching a permanent settlement between the United States and Iran. According to a research report issued by the firm, Oxford Economics raised its oil price forecasts after revising its previous assumption that a formal agreement between Washington and Tehran would restore normal commercial shipping traffic through the strait in the third quarter. The institute’s baseline scenario now assumes alternating periods of escalation and de-escalation, along with fluctuating oil flows, keeping the Brent crude average in the mid-$80s per barrel for the remainder of 2026, before prices gradually move toward pre-crisis levels.
**Markets Adapt to the Crisis**
Oxford Economics expects the current state of indecision to persist, rather than a swift move toward a lasting peace or a return to broad confrontation, with Gulf oil flows remaining disrupted to varying degrees until 2027. Nevertheless, the firm anticipates a gradual recovery in Gulf exports and a downward trend in crude prices, benefiting from the decline in lost supply volumes and the market’s ability to absorb the shock. Refined product markets remain tighter, implying that transport fuel prices may decline more slowly than crude, sustaining some inflationary pressures.
According to the report, an average of three oil tankers per day exited via Hormuz since March. UAE supplies declined by only about 8%, compared to an average drop of 46% among other Gulf producers, suggesting arrangements that allow some exporters to continue transit.
**Hormuz Alternatives Gradually Expand**
The report showed that while Gulf oil production fell by about 35%, the expansion of alternative export routes is gradually mitigating the impact of strait disruptions. Existing pipelines in Saudi Arabia and the UAE have the capacity to export approximately 6 million barrels per day of crude away from Hormuz, with an additional 3.5 million barrels per day redirected since February, primarily via the Saudi East-West pipeline. The firm also expects the UAE to add about 1.8 million barrels per day of export capacity via pipelines to Oman by the end of 2027, while Iraq extended an agreement to use a pipeline passing through Turkey.
Saudi Arabia and the UAE possess greater flexibility to expand existing infrastructure, whereas developing new routes for Kuwait and Iraq, particularly for Qatar’s liquefied natural gas (LNG) exports, will require additional time and investment.
**China Absorbs the Supply Shock**
China has emerged as one of the key factors in absorbing the crisis’s repercussions. Despite the loss of approximately 17.5 million barrels per day in Hormuz exports, Oxford Economics estimates that less than 3 million barrels per day actually need to be compensated for through drawdowns of inventories outside China and OECD countries, or through reduced consumption. China cut its crude imports by about 4.6 million barrels per day since February, constituting the largest element in adapting to the supply shortfall.
Beijing managed to reduce purchases without a corresponding drop in final consumption or significant inventory drawdowns, primarily by halting stockpiling activities. Although imports improved in July, they remained more than 30% below the levels seen in the fourth quarter of 2025, amid expectations of a gradual recovery driven by rising inventories, weak economic growth, and the expansion of transport electrification.
**Inventories Protect Market Balance**
Global inventory buffers form a cornerstone of the market’s ability to withstand Hormuz disruptions. The firm estimates these buffers at approximately 8 billion barrels, a level sufficient to withstand prolonged periods of supply shortage. Even with continued drawdowns at the rate recorded over the past two months, Oxford Economics expects inventories to remain above 7 billion barrels for an extended period in 2027, alongside the possibility of additional drawdowns from OECD strategic reserves if needed.
This buffer means that Gulf exports do not need to fully return to normal levels for price pressures to ease; a partial increase in tanker traffic is sufficient to alleviate the supply shortage.
**Partial Recovery Lowers Prices**
The firm cites June developments as evidence of this dynamic. During the three weeks the memorandum of understanding was in effect, Hormuz exports remained at only about a quarter of their normal levels. Yet, the average oil price was $72 per barrel, compared to $96 in the previous month. Oxford Economics expects prices to remain volatile and highly sensitive to news, but to trend downward on average as Gulf exports gradually recover and alternative routes expand.
