Oil outlook: Middle East tensions keep crude markets on edge

Oil markets are heading into September with a familiar problem: tight supply, depleted inventories and an unresolved Middle East conflict keeping upward pressure on crude prices.

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Brent crude has climbed sharply this week as tensions between the US and Iran have intensified. Brent was around US$96 a barrel on September 4, after gaining 7.6% over the week.

The key issue is that global inventories have been run down while supply through the Middle East remains disrupted. ANZ expects production from Iran and Saudi Arabia to remain under pressure through August and September, with Persian Gulf supply only beginning to recover towards the end of 2026.

That leaves the market vulnerable to another supply shock, particularly with northern hemisphere seasonal demand approaching.

Citi has lifted its Brent forecasts to US$110 a barrel for the second quarter, US$95 for the third quarter and US$80 for the fourth quarter of 2026, while assigning a 50% probability to that scenario.

Its more bullish case assumes continued disruption to oil flows through the Strait of Hormuz. Under that scenario, Brent could reach US$150 a barrel, with average prices around US$130 in the second and third quarters before easing later in the year.

The more extreme scenario is a prolonged closure of the Strait, which could push oil prices substantially higher again.

ANZ expects demand for global oil consumption to fall by 1.7 million barrels per day in 2026, averaging 102.5 million barrels per day.

China is an important part of the demand picture. Reuters’ August survey of 31 analysts put average 2026 Brent at US$85.08 a barrel, with US crude at US$80.20. Analysts also expect global oil demand to decline by between 1 million and 1.6 million barrels per day.

That creates an unusual tension for the market: supply is being squeezed at the same time as high prices are destroying demand.

For Australian investors, the oil price remains an important variable for the energy sector. Sustained crude prices around current levels could support cash flows and investment across Australian oil and gas producers, while higher fuel costs create a very different picture for transport, airlines and other energy intensive businesses.

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