Global Energy - June Commentary

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With Strait of Hormuz disruption now entering its fourth month, we take the opportunity to provide detailed answers to important questions that we are receiving from investors about oil price levels, minimum oil inventory operating levels, production recovery scenarios and energy equity valuations. Many see it as surprising that, since the start of the conflict, energy equities have underperformed global equities and that, for example, the shares of US super majors Exxon and Chevron have declined.

Why is the oil price not higher?

It is somewhat puzzling that the oil price is not higher, given the extent of Middle Eastern disruption. To rationalise the situation, we think that the following three factors have helped to keep oil prices lower than otherwise expected over the last three months:

1. Large buffers. The oil market was in an oversupplied state at the start of 2026 while oil and oil product inventories (including oil on the water) were at elevated levels. The weak oil macro outlook was very well telegraphed and reflected in the Brent oil price being just over $60/bl at the start of the year. As such, oil prices are up more than 50% so far this year.
2. Deal optimism. The re-opening of the Strait has been 'around the corner' at any moment, with persistently positive news flow from the United States that a resolution would lead to the re-opening of the Strait. We note that the Brent oil price (as it is referred to) is a contract that is delivered, on average, 8 weeks into the future. At any point in the last three months, it seemed possible that the Strait would be open in 8 weeks and hence forward oil prices have faced headwinds. The combination of optimism and contract structure has kept oil prices lower.
3. A rapid rebalancing of oil flows. In recent weeks we have seen a willingness from the US to rapidly increase oil exports (from around 5m b/day to around 9m b/day) and from China to rapidly reduce net oil imports (falling from around 13m b/day this time last year to around 7.5m b/day over the last few weeks). This has helped balance trade flows and reduce stress in the system, keeping oil prices under control.

Seaborne net oil exports from the United States and imports to China

Source: Vortexa, Morgan Stanley, June 2026

How long can oil and oil product inventories continue to draw?

With around 14m b/day of oil being disrupted (100m bls per week), only two factors can help to balance the market: demand change and inventory drawdown. In its most recent monthly report, the IEA estimates that global oil demand will be down around 4.3m b/day in April and 5.5m b/day in May 2026 (representing around one third of the 14m b/day of volumes being lost). If these demand numbers prove to be correct, then inventories must be shouldering around two thirds of the burden and falling at a rate of around 9m b/day (equivalent to 60m barrels per week or 270m barrels per month).

As of the end of May, we estimate that 1.1bn bls have already been lost to the market and that a further 0.8bn bls will be lost to the market by the time that supply is returned to normal, bringing the total loss to around 1.9bn bls. That total will increase by around 0.4bn bls for every month more that the strait remains closed. Therefore, we think it is fair to say that the total oil and oil product lost to the market will exceed 2bn bls.

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

Source: Guinness estimates, June 2026

As noted above, global oil and oil product inventories were robust at the start of the year, estimated by JP Morgan to be a total of around 8.4bn bls. Of this, around 1.8bn bls was held afloat at the start of the year, mostly in oil tankers transporting supply to market, meaning that around 6.6bn bls was held onshore in storage tanks, export terminals, pipelines and refineries.

The ‘bottom line’ for inventories is unclear since the industry has never suffered a supply shortage like this before. JP Morgan recently argued that much of this inventory is critical for the day-to-day operation of the oil industry and that in fact only 0.8bn bls can be removed from inventory before the system starts to suffer operational stress. In their words, “pipelines lose pressure flexibility, terminals cannot load efficiently, refiners struggle to secure the right grades on time, and traders bid aggressively for nearby supply. The system does not fail because oil disappears, it fails because the circulation network no longer has enough working volume.”

On their analysis, OECD commercial stocks could fall to operational floor levels by September if the Strait of Hormuz remains closed, assuming demand destruction stabilizes at 5.5m b/day (the rate seen in May 2026).

The IEA has also been very clear on the threat from minimum operating levels, with Director Fatih Birol saying “this may be difficult and we may be entering the red zone [for inventories] in July, August, if we don't see that there are some improvements in the situation."

We know that the critical ‘operating minimum’ levels will vary by country and by product type and, should the disruption continue, we would expect to hear of operational issues in the coming weeks and months. Assuming continued disruption through the Strait, we would expect oil and oil product prices to rise sharply in order to choke off more demand and maintain system flexibility.

How long will it take for production to recover and for ‘everything to return to normal’?

In our Managers’ Comments last month, we stated the case for a slower-than-expected restart to production. Once the Strait is opened, a series of logistics, storage, infrastructure and reservoir-related issues will need to be resolved before any form of normality can be achieved. We break them down broadly as follows:

1. Confidence. Shipowners and crude shippers will need to be confident that the Strait is a genuinely safe place to operate. While a ceasefire and agreement to open the Strait goes a long way towards achieving this, it does not necessarily provide the confidence required. The passage of time, the safe passage of vessels and positive political momentum will be needed. In practical terms, a safe – mine free – route through the strait needs to be delivered, and this could easily take weeks and months to achieve.
2. Tanker logistics. Tankers are now in the wrong places as many empty tankers have transited from outside the Gulf to West Africa or the United States to pick up other cargo rather than sitting idle outside the Strait. Getting tankers back into the right places will also take a number of weeks and, on its 1Q26 earnings call, Saudi Aramco's CEO called this "the biggest issue", adding that "even in the most optimistic scenario, the energy and commodity supply chains will need several months to return to their pre-conflict traffic, as vessels reroute or avoid being idle".
3. Storage in the Gulf. Onshore and floating storage of oil and oil products within the Gulf is broadly speaking at full capacity. Once empty tankers arrive, this oil can be offloaded and shipped to market, thus starting to allow the onshore oil production and refinery facilities to contemplate restarting. Nothing can happen at the production facilities upstream of these storage facilities until spare storage capacity is built.
4. Field restarts many shut-in oil fields will have to be restarted very carefully, even when storage is available. With many fields now static, reservoir pressures and wellbore temperatures will have fallen, allowing wax and asphaltenes to build up and plug production tubing. These effects and other equipment-related issues will be overcome with time and money, but recovery is likely to be uneven across fields and countries. The duration of the recovery is a difficult one to predict with certainty. We note that Rystad Energy estimates roughly 10,000 of the c.36,000 wells that were active before the closure across the six Gulf producers are currently offline. The number of wells which struggle to return scales with shut-in duration, it argues: about 2,800 wells face restart constraints after a two-month shut-in, 4,100 after four months and more than 5,000 after six months. We are already close to the four-month shut-in period.
5. Infrastructure damage. We understand that physical infrastructure damage is mostly related to downstream facilities such as refineries, export/storage terminals and LNG facilities. These can also be resolved with time and money. As with vessels passing through the Strait, we imagine that downstream operators will want to see high levels of confidence before starting the rebuilding process, so near-term processing volumes will be constrained.

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

Source: Rystad Energy, April 2026

Putting all this together, we do not expect the oil export system in the Gulf to return to normality before the end of 2026. This is a view mirrored by a number of Middle East oil companies, most recently by Sultan Ahmed Al Jaber, CEO of ADNOC (Abu Dhabi National Oil Company): “Even if this conflict ends tomorrow… full flows will not return before the first or even second quarter of 2027”. Saudi Aramco CEO Amin Nasser has said, “If the Strait of Hormuz opens today, it will still take months for the market to rebalance, and if its opening is delayed by a few more weeks, then normalization will last into 2027”.

In fact, we do not expect that we will return to the previous ‘normal’ for a significant period. A combination of longer-term reservoir damage, delayed infrastructure restarts and potentially restricted flow through the Strait itself means that the Gulf’s oil export system is unlikely to be considered as safe and reliable as it was. On the other hand, alternative export routes (e.g. pipelines) will be explored, albeit with high cost and complexity. When we look back on this conflict in the future, it seems likely that it will have redrawn the Gulf energy system very significantly, affecting supply and supply egress from the region in both positive and negative ways.

Is there still an opportunity in energy equities, or is all of this already priced in?

At the start of 2026, we calculated that energy equity valuations reflected a long-term Brent oil price of around $67/bl. As a result of the conflict, we increased our 2026 and 2027 Brent oil price estimates to $90/bl and $80/bl, respectively, and this increase (run through our discounted cash flow models) explains about half of the fund’s 30% return this year. The other half of the fund’s return is therefore reflected in a higher long-term oil price being implied, which we estimate has risen from around $67/bl to around $73/bl Brent.

We believe that $73/bl is a conservative long-term oil price estimate and, as we have long argued, we think that $80/bl Brent is a more realistic forecast. Should energy equities reflect $80/bl Brent in their valuation, we see 20% further upside.

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.