Crude Pulls Back as Diplomacy Returns While Supply Risks Persist
Crude prices moved lower this week as improving Middle Eastern flows eased some of the immediate supply concerns that had pushed WTI above $100/Bbl. Saudi Arabia has restarted flows through its 7 MMBbl/d East-West pipeline, while the head of US Central Command said crude flows through the Strait of Hormuz recently reached a six-month high.
On the sidelines of the UN General Assembly, the US and Iran discussed a phased agreement that could eventually reopen Hormuz and lift the American blockade on Iranian ports, with Tehran submitting a proposal that included conditions similar to those outlined in the June memorandum of understanding. However, any agreement would likely take time to translate into normalized shipping and higher physical flows.
That tightness remains visible in the physical market. The premium required to secure crude at Cushing rose to its highest level in data going back to 2017, with the WTI cash roll surging above $7/Bbl Thursday. Inventories at the hub have recovered from critically low levels but remain near their lowest seasonal level in more than a decade, while US refiners are running record crude volumes for this time of year and overseas demand for American barrels remains elevated.
At the same time, broader inventories continue to tighten. Crude stocks are estimated to have fallen by roughly 57 MMBbl through the first 18 days of September, led by onshore draws in Asia. The market therefore has fewer buffers than earlier in the conflict, meaning any renewed disruption or setback in negotiations could still have an outsized effect on prices.
AEGIS has shifted its Bal 26 WTI view from neutral to bullish. Crude flows through Hormuz have recovered, limiting some of the immediate upside pressure on prices. However, that recovery may also increase the risk of renewed escalation if Iran seeks to disrupt those flows and restore leverage over the oil market. We now see Bal 26 risks tilted to the upside, while normalization remains the primary downside risk.
For Cal 27, we remain neutral. The underlying balance still appears considerably more bearish if Middle Eastern flows normalize and expected supply growth materializes, but the size of that surplus remains highly dependent on the duration of the conflict. Continued supply constraints into 2027 could materially tighten the balance, while normalization would shift attention back toward oversupply and lower prices.
Crude Oil Factors
Strong Non-OPEC+ Growth (Bearish, Surprise) - The EIA expects a significant increase in non-OPEC+ supply over the next two years, led by the UAE, which is now operating outside OPEC production quotas. UAE crude output is projected to average more than 5.1 MMBbl/d in 2027, up from roughly 3.2-3.4 MMBbl/d before the conflict. Meanwhile, non-OPEC+ producers excluding the UAE and US are expected to contribute more than 1.2 MMBbl/d of incremental supply, increasing the risk of a more oversupplied market.
Hormuz Flows Rapid Recovery (Bearish, Surprise) - Analysts view continued Hormuz restrictions through the end of 2026 as a reasonable base-case assumption, with crude flows likely fluctuating between roughly 5–8 MMBbl/d depending on the intensity of Iranian attacks and the effectiveness of US military escorts.
New US-Iran MoU (Bearish, Priced In) - Iran and Oman continue negotiating a revenue-sharing arrangement for tanker traffic, but the Wall Street Journal reported that President Trump remains unwilling to return to the terms of the previous ceasefire agreement, leaving the prospect of a broader US-Iran settlement uncertain.
Unsanctioned Iran (Bearish, Priced In) - Treasury Secretary Scott Bessent said the US intends to intensify economic pressure on Iran while maintaining its naval blockade of Iranian ports. "It will be a combination of economic isolation like the world has never seen before and the continued blockade in the Strait of Hormuz that will keep anything from going in or out of the Iranian ports," Bessent said.
Reduced Chinese Buying (Bearish, Priced In) - Rystad Energy expects Chinese crude purchases to increase by as much as 1.2 MMBbl/d from 3Q through year-end 2026 after the world’s largest crude importer reduced purchases and refinery runs in response to the Middle East-driven price spike.
Speculator Positioning (Bearish, Priced In) - Speculative positioning has turned modestly less bullish. In the week ended September 15, managed money’s combined NYMEX and ICE WTI futures net length fell by approximately 5,800 contracts as new shorts outpaced additional longs. Positioning suggests caution rather than a broad shift toward an outright bearish crude outlook.
USD (Bearish, Priced In) - The Fed raised interest rates 25 basis points to 3.75% - 4.00%. Higher US rates, all else equal, can make dollar-denominated assets more attractive, supporting the US dollar. Because crude oil is priced globally in dollars, a stronger dollar tends to make oil more expensive in non-dollar currencies and can weigh on commodity demand and prices. While crude prices hardly reacted to the recent rate hike, sustained global monetary tightening would weigh on both global GDP growth and oil demand in 2027.
Inventories Reach Minimums (Bullish, Surprise) - The longer Hormuz remains restricted, the more important the global inventory cushion becomes. The market has so far absorbed reduced Middle Eastern supply through inventory draws, alternative export routes and escorted tanker traffic. However, continued stockdraws would leave the system with less flexibility to absorb another disruption.
Hormuz Flows Slow Recovery (Bullish, Surprise) - Tanker traffic remains well below pre-war levels, while continued attacks have forced some vessels to reconsider transiting the waterway, including three China-bound supertankers that recently reversed course. Some crude is still leaving the Persian Gulf through shuttling activity and vessels operating without transponders, but estimates of actual flows vary widely. Energy Aspects estimates roughly 4–6 MMBbl/d is moving through Hormuz, compared with US government estimates closer to 8–10 MMBbl/d, underscoring the uncertainty surrounding how much supply is actually reaching the market.
Geopolitical Risk Premium (Bullish, Surprise) - US strikes have targeted Iranian oil tankers, while additional vessels were reportedly struck off the coast of Oman. The conflict has also broadened beyond the Strait of Hormuz. Yemen’s Houthis have continued attacking Saudi energy infrastructure and have advanced toward coastal areas bordering the Bab el-Mandeb Strait, raising concerns that disruptions could intensify in the Red Sea. At the same time, Iran has announced plans for a new maritime exclusion zone that could further complicate tanker movements through the Gulf.
Red Sea Disruption (Bullish, Surprise) - Saudi Arabia is prepared to resume flows through its critical 7 MMBbl/d East-West pipeline, raising expectations that exports from the Red Sea port of Yanbu could soon restart. “The reopening of the East-West pipeline is forcing some additional reduction in the geopolitical risk premium,” said Ole Hansen of Saxo Bank. However, analysts expect the pipeline to initially operate at reduced rates and do not anticipate a quick return to full capacity.
Chinese Buying Normalizes (Bullish, Surprise) - Chinese crude purchases have rebounded as flows through the Strait of Hormuz remain constrained, according to Bloomberg. The shift has increased demand for alternative supplies, pushing up prices for African, Canadian and Latin American crude.
Supply Buffer Depletion (Bullish, Priced In) - The conflict has significantly reduced global supply buffers, leaving the market increasingly vulnerable to future disruptions. Combined US commercial and strategic petroleum inventories have fallen to their lowest levels since 1985, despite refinery throughput running more than 4 MMBbl/d higher than at that time. Inventories at Cushing remain near operational minimums, while stocks across Asia excluding China have also declined sharply.
Oil/Product Inventories (Bullish, Priced In) - According to JP Morgan, Global inventories of crude and refined products have fallen by about 555 MMBbl since the conflict began, only around one-third of the decline the bank had projected earlier this year. At the same time, global oil demand has run about 4.4 MMBbl/d below year-ago levels, helping offset supply losses. By leaning much more on demand destruction and much less on stock draws, the market has been able to absorb an extraordinary supply disruption without a sustained rise in crude prices.
Hormuz Flow Disruption (Bullish, Surprise) - Confirmed attacks on tankers in the Strait of Hormuz have accelerated, rising from an average of 2.3 per week in August to 2.7 per week MTD, as Tehran seeks to deter rising transits that threaten to erode its leverage. Hormuz crude flows are broadly around 8 MMBbl/d.
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