Oil supply surge expected after Hormuz reopening, but price collapse unlikely

The US and Iran reached a framework agreement to extend the current ceasefire by 60 days and reopen the Strait of Hormuz to shipping.

The pact is scheduled to be signed this Friday in Switzerland, paving the way for the gradual resumption of energy exports from the Gulf region.

Energy markets reacted with immediate relief. Brent crude slipped below $80 per barrel, trading more than $20 lower than just over a week ago.

However, Commerzbank AG cautions that any expectations of a rapid return to pre-war oil price levels may be premature.

Significant production upside exists

Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank AG, analysed the potential supply response once the strait reopens.

She pointed out that several Gulf producers are well-positioned to increase output beyond pre-war levels in the medium to long term.

“In fact, some of the countries in the Gulf region can be expected to increase their production above pre-war levels in the medium to long term,” Nguyen said.

OPEC members had already begun unwinding voluntary production cuts.

In April, eight OPEC members restarted the process of reversing the last tranche of voluntary cuts amounting to 1.65 million barrels per day.

Since April, 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.

Limits on full capacity utilisation

Despite the large potential, Nguyen stressed that countries are unlikely to fully utilise their spare capacity. 

“However, it cannot be assumed that countries with spare capacity will fully utilise it – or even be able to do so,” she explained.

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.

Strong inventory rebuilding demand expected. A major offsetting factor will be robust demand from inventory restocking.

OECD commercial oil inventories have already declined sharply.

According to EIA data, OECD inventories stood 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. Nguyen said the bank expects 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.

“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,” Nguyen said, while adding important caveats about realistic utilisation rates and restocking demand.

Bumpy diplomatic road ahead

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.

The coming months will test whether diplomatic progress holds and how quickly Gulf producers can safely ramp up exports.

For now, the market has shifted from acute shortage fears to cautious optimism about normalisation.

How producers manage their spare capacity and how quickly inventories are rebuilt will ultimately determine the extent of any price correction in 2027 and beyond.