Key Takeaways
- The EIA now expects 2026 Brent to average $79.39 per barrel and 2027 to average $94.85, reflecting modest upward revision for 2027 and downward revision for 2026.
- The spike in prices is tied to the de facto closure of the Strait of Hormuz, a critical chokepoint linked to the U.S.–Iran conflict. – Implied volatility has surged to over 100 %, the highest since the Covid‑19 pandemic, signalling extreme market uncertainty.
- The agency assumes the Strait will reopen in late May, with full production recovery not expected until early 2027.
- Global demand growth has been trimmed; demand is projected to rise 0.2 million b/d in 2026 and 1.5 million b/d in 2027.
- If the Strait remains closed an extra month, Brent could stay $20 per barrel above current forecasts for the near term.
Revised Forecast Numbers
The Energy Information Administration’s May short‑term outlook (STEO) projects a 2026 Brent spot price average of $79.39 per barrel and a 2027 average of $94.85 per barrel. These figures represent a slight dip from the previous 2026 forecast of $96.00 per barrel and a modest increase from the prior 2027 forecast of $76.09 per barrel. The report also provides a quarterly breakdown: prices are expected to fall from $109.73 in Q2 2026 to $75.00 by Q4 2026, then gradually rise again to around $89 per barrel by Q4 2027. Compared with the April STEO, the 2026 outlook has been trimmed while the 2027 outlook has been lifted, reflecting evolving assumptions about the duration and resolution of the geopolitical shock.
Supply Disruption and Geopolitical Risk
The EIA explains that the Strait of Hormuz has been effectively closed since late February due to heightened U.S.–Iran tensions, cutting off roughly 20 percent of global oil supply. This disruption has driven Brent’s spot price to $117 per barrel in April, a $46 increase from February and the highest level since mid‑2022. Daily price spikes reached $138 per barrel on April 7, underscoring the immediate impact of reduced transit capacity on global markets. The agency stresses that the closure has generated cascading effects throughout oil supply chains, amplifying volatility and pushing prices far above pre‑conflict norms.
Spot–Futures Dynamics and Volatility
According to the May STEO, daily Brent spot prices rose sharply in April, widening the gap between spot and front‑month futures to nearly $30 per barrel early in the month. This differential reflected intense competition among buyers seeking to replace disrupted barrels. While prices remained elevated later in the month, the spread narrowed as trade flows adjusted and refiners secured alternative sources. The report notes that front‑month futures experienced heavy volatility due to uncertainty over how long the disruption would persist, a condition that has driven overall market nervousness.
Revised Closure Timeline and Production Shut‑Ins
The EIA now assumes that the Strait will stay effectively closed through late May, with partial flows resuming in late May or early June. Full normalization of pre‑conflict trade patterns is not expected until late 2026 or early 2027. The agency also projects that shut‑in production will peak at nearly 10.8 million barrels per day in May as storage limits force additional cuts, particularly from Iran, whose export capabilities have been curtailed by the U.S. blockade.
Magnitude of Shut‑In Production
Since the conflict began, the EIA has raised its estimate of shut‑in volumes. In April, shut‑in production averaged 10.5 million barrels per day, and the agency expects this to climb to 10.8 million barrels per day in May as inventories approach maximum capacity. The upward revision stems from the anticipation that Iran will be forced to curb output due to export restrictions, compounding the supply shortfall already created by the Strait’s closure. These dynamics are expected to keep upward pressure on prices throughout the forecast horizon.
Demand Growth Reassessment
The EIA observes that oil demand reacts more quickly to high prices than supply does. Consequently, the agency has trimmed its growth assumptions, projecting global oil demand to increase by an average of 0.2 million barrels per day in 2026, down from 0.6 million b/d in the previous STEO and from 1.2 million b/d in the February edition. The cut reflects weaker demand in Asia, where governments have introduced fuel‑saving measures and faced shortages. Demand is expected to rebound in 2027, reaching 1.5 million b/d growth and supporting prices around $79 per barrel on average.
Inventory Drawdowns and Price Forecast Path
Because of the persistent disruption, global inventories are projected to fall by about 8.5 million barrels per day in Q2 2026, pushing Brent to roughly $106 per barrel in May and June. As the Strait gradually reopens and shut‑in volumes decline, inventory withdrawals will lessen, allowing prices to drop to an average of $89 per barrel by Q4 2026. Over the full year 2027, the EIA expects inventories to begin rebuilding again, leading to a gradual price decline to $79 per barrel.
Extended Closure Scenario and Price Implications The agency’s baseline assumes the Strait reopens in late May. If reopening is delayed until late June, the EIA estimates that Brent prices would stay over $20 per barrel higher than the current forecast for the near term, with the premium persisting into the following year but gradually narrowing. This scenario underscores the high sensitivity of oil markets to any extension of the disruption.
Industry Perspectives on the Outlook
External analysts have echoed the EIA’s concerns. Enverus Intelligence Research maintains a “higher‑for‑longer” stance, keeping its average Brent forecast at $95 per barrel for 2026 and $100 per barrel for 2027. Their base case assumes a three‑month closure, with each additional month adding $10–$15 per barrel to the price outlook. Standard Chartered Bank projects that prices will remain “headline‑driven” in the near term, potentially staying $10–$20 per barrel above pre‑conflict levels and ending the year around $80 per barrel, supported by strategic reserve purchases and lingering logistical lags. Both firms highlight the risk of extended supply constraints and the resulting price premium. Key Takeaways and Outlook Summary
The EIA’s May STEO paints a picture of a market still reeling from the Strait of Hormuz closure, with prices elevated by heightened volatility and limited alternative routes. While the agency expects the chokepoint to reopen in late May, full recovery of production and pricing balance is not anticipated until early 2027. Revised forecasts show modest upward pressure on 2027 prices, but a trimmed demand growth outlook and potential extensions of the closure introduce considerable uncertainty. Stakeholders should therefore monitor geopolitical developments closely, as even a short delay could keep Brent prices $20 per barrel higher than current expectations and sustain a risk premium throughout the forecast period.