The U.S. Energy Information Administration now sees the global oil market tightening significantly faster than expected, projecting an average inventory decline of 2.6 million barrels per day for 2026 as the conflict in the Middle East keeps the Strait of Hormuz shut.
In its monthly Short-Term Energy Outlook, the agency said its forecast assumes the critical shipping chokepoint will remain closed through late May before reopening gradually. "Disrupted production leads to large oil inventory draws, particularly in May and June," the EIA said in the report released Tuesday. The new forecast is a dramatic revision from the 300,000 barrel-per-day draw estimated in April.
The updated outlook is based on an estimated 10.5 million barrels per day of crude oil production that was collectively shut-in during April by Iraq, Saudi Arabia, Kuwait, the U.A.E., Qatar, and Bahrain. The resulting supply shock is expected to create an 8.5 million barrel-per-day inventory draw in the second quarter alone, keeping Brent crude prices near $106 a barrel for May and June.
The agency’s forecast now assumes the conflict, which has stranded nearly a fifth of the world’s oil supply, will have a more lasting impact on prices through year-end. "The timing of resumed oil flows through the Strait of Hormuz and the subsequent rate at which Middle Eastern producers restore output are key factors influencing EIA’s price forecasts," EIA Administrator Tristan Abbey said in a statement.
Supply Shock Hits Global Markets
The EIA's projections quantify the severe impact of the regional conflict on global energy supplies. The agency expects that even after the Strait of Hormuz begins to reopen in June, shipment volumes will not return to pre-war levels until later in the year, with some Middle East production remaining offline during that period.
This supply constraint is expected to be partially offset by a reduction in global demand, particularly from Asian economies that are more reliant on Middle Eastern crude. The EIA slashed its forecast for 2026 global demand growth to just 200,000 barrels per day, down from a previous estimate of 600,000 barrels per day. For 2027, the agency projects demand growth will rebound to 1.5 million barrels per day as inventories begin to rebuild at a faster-than-previously-estimated pace of 3.9 million barrels per day.
Price Forecasts and Investor Implications
The EIA’s full-year price estimates were little changed from its April outlook, with the agency seeing Brent crude averaging about $95 a barrel in 2026 before falling to $79 in 2027. West Texas Intermediate is expected to average $86 this year and $74 next year. In the U.S., the disruption is forecast to push retail gasoline prices to an average of $3.88 a gallon this year, 18 cents higher than the April projection.
The sustained high prices will benefit energy producers, particularly those outside the conflict region. U.S.-focused upstream companies like Diamondback Energy (FANG) and Devon Energy (DVN) are positioned to see strong free cash flow. Devon estimates that oil at $110 per barrel would support a free cash flow yield of 21 percent. Integrated giants like Chevron (CVX), which maintains a 3.9% dividend yield, offer a more conservative way to gain exposure to the high-price environment.
This article is for informational purposes only and does not constitute investment advice.
