Oil Market Normalization Expected by Summer 2027 Following US-Iran Deal
A tentative agreement between the United States and Iran seeks to end their conflict, including a provision to reopen the Strait of Hormuz, a critical waterway for global oil and natural gas shipments. Despite the deal, energy analysts predict a full return to normal market conditions will not materialize until summer 2027, with physical crude markets expected to remain tight throughout the current summer. The Strait's closure has been described as the largest oil market disruption in history by the International Energy Agency.
A memorandum of understanding was announced Sunday between the United States and Iran, aiming to conclude their ongoing conflict that has persisted since February. The tentative agreement, scheduled for formal signing on Friday, includes a provision to reopen the Strait of Hormuz, which would allow Middle East-produced oil and natural gas to resume global shipments.
However, energy analysts caution that physical energy markets are likely to remain constrained well into next year. S&P Global analysts stated in a research brief published Monday that while the deal alleviates long-term oil supply concerns, a complete normalization of flows is not anticipated until the summer of 2027. Physical crude markets are also expected to remain tight throughout the current summer. The International Energy Agency previously characterized the Strait's closure to commercial traffic for months as the largest oil market disruption in history, with supply losses projected to exceed 1.5 billion barrels by the end of June, according to S&P.
President Donald Trump announced the framework deal via social media, stating the Strait would reopen "toll-free" and that the U.S. would lift its naval blockade on Iranian ports. Despite this announcement, a BBC analysis published Tuesday indicated that traffic has remained subdued, with only seven vessels having transited the strait since the deal was made public, while nearly 600 tankers and cargo ships remained largely idle in the Persian Gulf.
Researchers at Oxford Economics, in a research note published Monday, suggested that sailing through the Strait would likely remain riskier and more costly than before the conflict. They anticipate that physical flows will recover gradually rather than immediately, even if prices react more swiftly to signs of a credible reopening. Shipping difficulties, elevated insurance costs, and operational caution are expected to be the primary constraints moving forward, even if oil production capacity rapidly returns to pre-war levels.
Obstacles also persist on the supply side. Analysts at energy consultancy Wood Mackenzie outlined in a May 29 note that production normalization would require time, even under a best-case scenario. An immediate reopening of the strait could see oil fields return to 70% of previous production within three months and 90% within six months. The final portion, approximately 1 million barrels of production per day, is expected to take considerably longer due to necessary infrastructural repairs. Among major Gulf exporters, Saudi Arabia and the United Arab Emirates are projected to recover faster due to their high-quality reservoirs, infrastructure, and existing export pipeline capacity that can bypass the strait, whereas countries with older infrastructure, such as Iraq, are expected to recover more slowly.
Other research aligns with this conclusion. Capital Economics estimated on Monday that about 80% of energy flows could resume by the third quarter of 2026, but a full return to "normal" is not expected until 2027.
(Source: Fortune)
