Oil Prices Could Retreat to $60 by 2027 as Markets Seek New Equilibrium

Global markets are seeking a new equilibrium following the volatility in energy prices driven by geopolitical developments in the Middle East. A recently reached Memorandum of Understanding (MoU) between the United States and Iran, aimed at reopening the Strait of Hormuz, has put significant downward pressure on oil prices. In light of this development, Citigroup (Citi) analysts have shared a forecast suggesting that Brent crude oil prices could decline to $60 to $65 per barrel by the first quarter of 2027. Goldman Sachs also indicated a downside scenario where Brent crude could fall below $60 in 2027, assuming an earlier supply recovery and persistent demand losses.

Oil prices experienced a sharp increase at the onset of the geopolitical conflict in the Middle East. During this period, the closure or disruption of the Strait of Hormuz severely impacted shipments through this critical waterway, which accounts for approximately one-fifth of global oil supply. The International Energy Agency (IEA) characterized this situation as the "greatest global energy security challenge in history," with Brent crude oil prices surging past $120 per barrel. However, market relief followed President Trump's announcement of an interim deal to reopen the Strait of Hormuz. Under the MoU between Iran and the US, the US blockade on Iran is expected to be lifted, and flows through the strait are anticipated to normalize.

Upon the announcement of the agreement, a notable decline in oil markets was observed. Brent crude prices fell below $80, reaching their lowest levels since the beginning of the conflict. Analysts expect the geopolitical risk premium to unwind, with millions of barrels of Middle Eastern oil returning to global markets. This decline is seen as a positive development for sectors sensitive to fuel costs, such as airlines, transportation, and retail. Nevertheless, persistently low global oil inventories and the need to replenish strategic reserves could provide some underlying support for prices.

In the broader economic context of this development, fundamental dynamics in the global energy market are once again coming to the forefront. Factors such as increased supply from the U.S., Brazil, Guyana, Venezuela, and the UAE, coupled with weakening demand partly due to China's shift towards electric vehicles, are noted to be pressuring demand. Furthermore, the U.S. strategic oil reserves are near levels last seen in 1983, highlighting the need for these reserves to be refilled. This situation, even if a short-term market surplus emerges, could establish a floor for prices in the longer term.

Analysts and market expectations suggest that the upcoming period for oil markets could be a "rollercoaster ride". Citi maintains its base case that with the normalization of Strait of Hormuz flows, oil markets will move into a surplus, and prices will re-anchor to the weaker fundamentals that existed before the conflict. While Goldman Sachs forecasts Brent crude to average $75 and WTI crude at $70 in 2027, they also acknowledge upside risks, such as continued disruption in the strait. Therefore, market participants must closely monitor both supply-demand balances and geopolitical developments.