Global Energy - May Commentary

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The global oil market faces a major supply shock through the rest of 2026, even if the Strait of Hormuz reopens shortly. Weaker demand is partly offsetting the imbalance, but inventories – both commercial and strategic – are drawing rapidly and absorbing much of the shock. These stocks will need to be rebuilt and likely expanded, implying tighter fundamentals and higher prices into 2027–2028 than previously expected.

The continued blockage of the Strait of Hormuz has removed around 12m b/day of oil and products from global supply for the past 66 days – nearly 0.8bn barrels in total, rising by around 0.36bn barrels for each additional month of disruption. Reopening the Strait remains critical, as there are no viable alternative routes for these Middle Eastern volumes to reach global markets.

A longer blockage means a slower production recovery

Each month of disruption tightens the market while also complicating and delaying the restart process, leading to slower recovery and greater ultimate supply losses. Reservoirs left idle for weeks require increasing time and effort to restore previous output, with each additional day adding to the challenge. Surface infrastructure must be restarted carefully, and the wider supply chain – tankers, pipelines, and storage – will take time to normalise.

Every oil field is different, but according to the IEA in mid-April, “An estimated 50% of Gulf country upstream fields have sufficient reservoir pressure and fluid characteristics to return to pre-war levels within approximately two weeks, rising to 80% around one month later. This is contingent upon the security situation in each country, the ability of companies to mobilise skilled labour and contractors, and the normalisation of supply chains, all of which could significantly constrain the return to pre-war production rates. The remaining 20% of fields face more complex restart challenges, such as pressure depletion or flow impairment from wax or asphaltene deposition.”

Put another way, analysis from Rystad Energy shows that around 16m b/day (64%) of Middle East crude and condensate production has medium-pressure support, 7m b/day (28%) has low-pressure support and 2m b/day (8%) has very low-pressure support. Those reservoirs with lower reservoir support will require more energy to restart them and will likely have a slower supply response with potential longer-term negative capacity implications. On their analysis, most countries have a mix of medium and low-pressure reservoirs.

Gulf crude and condensate production (m b/d) split by reservoir pressure support

Source: Rystad Energy, April 2026

In engineering terms, the production restart of a lower-pressure field will require higher levels of water or gas for reinjection as well as more intense well workovers, requiring more skilled personnel, equipment and services. Based on the Rystad data, Kuwait has a broadly equal mix of medium and low-pressure, but Sheikh Nawaf, CEO of Kuwait Petroleum Corporation, was quoted in March as saying “Kuwait would take three to four months to return output to full production levels even if the war were to end today.”

We think it is important to reiterate that there is no historic precedent for the speed of recovery from a situation like this; this is the first time that such a wide range of facilities in a broad region have been shut in for such a sustained period. But taking a sensible mid-point from the analysis that we see, a reasonable assumption seems be around 70% of lost production being recovered three months after reopening and around 90% being recovered after six months. If correct, this implies an additional c.0.8bn barrels of supply losses during the recovery phase over the six months to the end of 2026.

So, even if the Strait were to re-open today (we are writing this on May 7), the total inventory loss will likely be around 1.6bn barrels (i.e. allowing for the barrels already lost and the phased return of production as detailed above). Should flow through the Strait not restart until the end of May or June, the total loss would increase to around 1.8bn or 2.2bn barrels respectively.  

Oil and oil products lost to the market as a result of Strait of Hormuz disruption

Source: Guinness estimates, April 2026

The market balances through demand reductions and inventory reductions

Since the start of the conflict, the global oil market has adjusted to the 12m b/day supply disruption broadly in two forms:

• First, demand has fallen due either to higher prices or the practical inability to consume oil and products. We distinguish between temporary demand loss (which recovers as prices normalise or supply returns) and structural demand destruction (where consumers permanently switch away from oil consumption). While the balance between the two will only become clear over time, current evidence suggests the impact has so far been more temporary than structural. We estimate global oil demand fell by around 4m b/day in April (c.4% of world demand), with further reductions likely if the disruption persists. If the blockage ended today, we estimate demand reduction could offset around 0.5bn barrels of the existing 1.6bn barrel supply shock.
• Secondly, inventory draws of around 8m b/day have helped offset the loss of supply. Here, we distinguish between strategic and commercial inventories. Recent data suggests strategic releases are running at around 2m b/day, implying commercial stocks are drawing at roughly 6m b/day. Given inventory data is incomplete and lagged, our estimates are based on disrupted supply volumes rather than reported stock changes. On this basis, inventories could decline by more than 1bn barrels by end-2026 in response to the supply shock.

Impact of inventories on oil prices

Regular readers of our updates will know that we often refer to OECD oil and oil product inventory levels. We do this because there is a good-quality historic data set (reported monthly by the IEA since 1984) and because there is a very strong inverse correlation between the level of OECD inventory and the price of Brent oil. OECD inventories were at 2.8bn barrels at the end of 2025.

OECD oil and oil product inventories (inverted) together with Brent oil prices

Source: IEA, Bloomberg; data to 31.12.2025

OECD inventories do not capture the full oil market. Inventories in the non-OECD have grown (in line with non-OECD demand growth) and we estimate that combined global oil and oil product inventories (including commercial and strategic on land and on water but excluding inventories in transit) are now around 6.6bn barrels. If the 1bn barrels inventory reduction that we envisage were to be split pro-rata across the OECD and non-OECD, it would imply an OECD oil and oil production inventory fall of around 0.5bn barrels. Based on the historic monthly price/inventory relationship since 2013, that would imply Brent oil prices of around $150/bl.

OECD oil and oil product inventories correlated to Brent oil prices

Source: Bloomberg, IEA, Guinness estimates; data to 31.12.2025

A tighter market ahead as inventories need to be rebuilt

Looking further out, once the Strait is open and flows return to more normal levels, the longer-term job of rebuilding global oil and oil product inventory begins. We make the simple assumption here that long-term demand and supply is unaffected by the Hormuz closure and we focus our analysis purely on the rebuilding of the 1.0bn barrels of lost inventory (as of today). If this were rebuilt over 2027 and 2028, it would imply an additional 1.4m b/day of oil demand, an increase of around 1.3% to global oil demand forecasts in 2027 and 2028, all else being equal.

However, we think that this probably underestimates the scale of inventory rebuild. Given the severity of this supply shock, we believe that many governments will seek higher levels of inventories in the future, providing an additional buffer to cover potential future supply shocks. Should governments request levels of commercial and strategic inventories that are 10% higher (0.6bn barrels) or 20% higher (1.3bn barrels) it would imply a further 1m or 2m b/day of demand respectively over 2027 and 2028, a further 1-2% increase to demand, assuming no other negative demand side effects.

Combined, a rebuild and growth in inventory levels would bring an increase to global oil demand of around 3% in 2027/2028, implying substantially tighter markets and requiring a higher oil price than was envisioned prior to the conflict.

UAE announces its decision to leave OPEC and OPEC+

With this in mind, it does not come as too much of a surprise that the United Arab Emirates announced on 28th April that it will be leaving OPEC and OPEC+, effective from 1st May 2026. The UAE joined OPEC in 1967, seven years after its creation, and became the fourth largest producer in 2025 (behind Saudi Arabia, Iran and Iraq).

The announcement follows a number of years of growing tensions from the UAE with respect to its production quota within OPEC. These were most pronounced in 2021, when the country threatened to leave OPEC unless it received a quota increase (which was ultimately granted). The UAE’s unhappiness had been clear for a long period, with the country regularly overproducing by 0.2-0.3m b/day versus its production quota.

The UAE stated that it would “continue to act responsibly, bringing additional production to market in a gradual and measured manner, aligned with demand and market conditions” and that “this decision does not alter the UAE’s commitment to global market stability or its approach based on cooperation with producers and consumers”.

UAE production (m b/day)

Source: DnB Carnegie, May 2026

Oil prices barely reacted to news of the UAE’s departure, with developments around the Iran conflict remaining the dominant near-term driver. We therefore expect limited immediate impact, as the UAE cannot raise production while the Strait of Hormuz remains blocked. Once flows resume, the UAE is likely to maximise output to help restore supply and rebuild inventories. We expect other Middle Eastern OPEC producers to act similarly, and do not believe the UAE’s response would differ materially had it remained within OPEC. Indeed, incremental UAE supply could play an important role in offsetting the post-restart production losses outlined above.

Over the longer term, the move could set a precedent for other members and raises questions about OPEC’s future cohesion. While several countries have exited before (Indonesia, Qatar, Ecuador and Angola), the UAE is the most significant departure to date, leaving Saudi Arabia accounting for 38% of remaining OPEC crude production and 24% of OPEC+. Despite this, OPEC+ remains substantial; (around 48m b/day, or 45% of 2025 global oil and NGL supply), with Saudi Arabia and Russia still broadly aligned in both scale and commitment to the group.

Global oil supply in 2025, including UAE in OPEC+ (m b/day)

Source: IEA, as of May 2026

In one respect, Saudi Arabia may now benefit from simpler decision-making within OPEC, but will also shoulder a greater share of production management. The UAE’s exit reduces OPEC spare capacity from c.3.1m b/day to c.2.5m b/day, concentrated in Saudi Arabia (1.7m b/day), Kuwait (0.4m b/day), and Iraq (0.3m b/day), leaving the group with less flexibility and reduced pricing power.

Time will tell whether this decision has positive or negative outcomes for the UAE. The outcome will be closely monitored by other OPEC members, who will assess whether there is greater benefit to them of being outside the group than of being in it. As such, the next few OPEC meetings are likely to be more significant than usual.

The value of this investment can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you invested.