Higher oil prices as geopolitical risks persist

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What was expected to be a year defined by ample oil supply has changed quickly. Supply disruptions in the Middle East have tightened the market and pushed prices higher.

A chokepoint under pressure

At the centre of the current market stress lies the Strait of Hormuz, a critical chokepoint for global oil trade. In normal circumstances, around 20 million barrels per day (mb/d) pass through the strait. The ongoing conflict, however, has severely disrupted these flows. Even with oil being rerouted and the emergency stockpiles being used, the market is still short by around 11 mb/d.

The impact is significant. Oil production has been shut down, temporarily removing more than 20 million barrels from global supply. Around 350 oil tankers remain blocked in the strait, unable to secure insurance. At the same time, attacks on refineries in the Gulf have disrupted around 4 mb/d of output, hitting diesel and jet fuel supplies especially hard.

OPEC weakened

Another source of uncertainty is the decision by the United Arab Emirates to leave OPEC.
As its third-largest producer, its exit weakens OPEC’s influence over the oil market (and therefore the price) and highlights growing tensions with Saudi Arabia. Russian officials have said the move is unlikely to trigger a price war in the near term, given current supply shortages linked to the Iran conflict. However, outside OPEC constraints, the UAE will be free to produce at full capacity once conditions allow.

Jet fuel shortages hit Europe

The consequence of the blockade is now also materialising in the skies over Europe. Jet fuel supplies are tight, as Middle Eastern producers normally cover around 40% of Europe’s kerosene imports. With these flows disrupted, prices have risen to more than double pre‑war levels.

While fuel supply has not completely collapsed, Europe is being forced to reorganise trade flows at higher cost. Without a lasting solution, airlines could start to feel the impact more clearly in the coming period. Airlines are already cancelling flights in response to fuel shortages and higher costs.

The disruption is not limited to aviation. Other sectors are also affected by the blockage of the Strait of Hormuz. Fertiliser supplies, which rely heavily on shipping through the strait, are coming under pressure, with potential knock‑on effects for the agricultural sector through higher input costs and reduced availability.

Outlook uncertain

ABN AMRO’s base case assumes that supply disruptions will ease by the end of May, but the likelihood that disruptions persist for longer has increased. The longer disruptions persist, the higher the likelihood that tensions escalate into a more severe and sustained supply shock. Although the suspension of US air strikes has created room for negotiations, progress remains dependent on several critical conditions. These include confirmation of the ceasefire, safer shipping arrangements, potentially under international supervision, partial easing of sanctions on Iran, and fewer restrictions on transit through the Strait of Hormuz. If these conditions are met, oil flows could recover gradually: first by 6 to 10 mb/d, followed by a return towards normal levels in the second half of the year.

Price outlook: higher for longer

For now ABN AMRO expects Brent to average USD 100 per barrel in Q2, gradually declining to USD 80 per barrel by year-end, resulting in a yearly average of USD 86 per barrel.

However, the forecast remains highly sensitive to unpredictable developments tied to the ongoing conflict, which are difficult to predict at this stage. ABN AMRO expects energy prices to normalize gradually but remain higher than pre-conflict levels.

The current crisis is predominantly logistical rather than structural: infrastructure damage has been limited, production capacity remains available. At the same time, demand growth is slowing due to macroeconomic weakness and energy efficiency gains, while supply from outside OPEC+ is increasing. Together, these factors should help restore balance in the market over time.

This market comment was provided by Jan Wirken, Equity Research & Advisory Expert at ABN AMRO.

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