Brent to stay volatile amid US-Iran talks; $89-98 range in focus: Analyst

Oil under pressure as US-Iran walk a tight rope to end war

Global crude markets entered the week in a state of cautious retrenchment. WTI futures traded below $93 per barrel mid-week, near a five-week low, as markets weighed optimism over ongoing US–Iran negotiations against renewed military operations in southern Iran. The price action reflects a market transitioning from acute crisis pricing toward a de-escalation premium discount cycle — but one still underpinned by structural tightness that shows no sign of resolving quickly. Oil prices, which surged sharply in March and April, are now on track for a monthly decline as markets weigh a fragile ceasefire against rapidly tightening global inventories. The net result is a market that is neither comfortably bearish nor cleanly bullish — it is volatile, event-driven, and acutely sensitive to diplomatic developments.

Geopolitical developments: US–Iran in the final stretch

Geopolitical developments in the US–Iran corridor remained a key market focus, with President Trump indicating that a deal to reopen the Strait of Hormuz is “largely negotiated,” potentially beginning with a memorandum of understanding, followed by broader talks within 30–60 days. However, market confidence remains cautious. Secretary of State Rubio described discussions as ongoing, with a “solid framework” under consideration. Key US conditions include preventing Iran’s nuclear ambitions, ensuring free passage through Hormuz without tolls, and the surrender of enriched uranium, highlighting unresolved complexities despite apparent progress. Until a formal agreement is signed and physical flows are verified, the geopolitical risk premium — estimated conservatively at $8–12/bbl — will persist in spot markets.

Macro-economic backdrop: Demand under pressure

The week's economic data reinforced a picture of growth resilience clouded by energy-driven inflationary overhang. In the United States, the S&P Global Manufacturing PMI rose to 55.3 in May from 54.5 in April, with new orders rising at the fastest pace in four years and output growth accelerating, though the signal is partly distorted by war-related stockpiling rather than genuine end-demand expansion. Federal Reserve officials emphasised that recent inflation — particularly in services, tariffs, and energy — has "not been great," pushing out the timeline for lower rates, with the policy rate described as "well positioned" on indefinite hold. In China, industrial output rose 5.7% year-on-year in March, but retail sales decelerated sharply to 1.7% growth, with consumer spending softening as subsidy impacts wane. Chinese crude oil imports were down 2.8% by volume compared to the prior year, reflecting both elevated prices and alternative energy substitution. In the Eurozone, CPI inflation accelerates in May 2026 as energy price pass-through of higher energy costs, though producer prices turned positive for the first time since 2022. Taken together, macro signals point to demand softening at the margin — a headwind that limits the upside ceiling even in a supply-constrained environment.

Global supply and inventory dynamics

The inventory picture remains the most alarming structural feature of this market. Global observed oil inventories drew by 129 million barrels (mb) in March and a further 117 mb in April, with on-land stocks dropping by 170 mb (-5.7 mb/d) in April alone. OECD countries' on-land stocks plummeted by 146 mb (-4.9 mb/d) in the same period. The EIA estimates global oil inventories are falling at an average of 8.5 mb/d in Q2 2026. Starting from OECD strategic reserves of approximately 1.2 billion barrels as of early March — and having sustained two-plus months of accelerated drawdowns — usable OECD buffer cover has contracted to a level that we estimate can sustain the current supply gap for fewer than 45 additional days without a meaningful resumption of Hormuz flows. Global supply is projected to decline by 3.9 mb/d on average across 2026, with Gulf output running 14.4 mb/d below pre-war levels, partially offset by Atlantic Basin supply gains. OPEC's spare capacity — a critical backstop — has been severely impaired: OPEC's spare capacity is now expected to average only 2.5 mb/d in 2027, down sharply from a pre-war estimate of 3.8 mb/d.

Oil Price outlook

Three scenarios merit quantification.

Full de-escalation scenario — a signed deal, Hormuz reopening in June, and gradual production restart — We expect Brent crude falling to an average of $89/b in Q4 2026 and $76/b across 2027. This implies a potential downside of $12–15/bbl from current levels, representing the deflation of residual risk premium and the early stages of inventory rebuilding.

 

Under a partial resolution scenario — a phased reopening with protracted nuclear negotiations creating persistent uncertainty — prices likely stabilise in the $88–98/bbl range, where the structural supply deficit and recovering demand provide a floor.

 

Under a deal collapse scenario, with negotiations failing and a return to active hostilities, prices could retest the $115–130 range, with Brent spot potentially spiking to $140 or beyond, as was observed in April. Crucially, the pre-conflict structural floor for Brent has risen materially — from the $58–68/bbl range that prevailed in early 2026 to a revised floor of approximately $75–80/bbl, reflecting permanent capacity destruction and the compression of OPEC spare buffers.  ===================  (Disclaimer: This article is by Mohammed Imran, research analyst, Mirae Asset Sharekhan. Views expressed are his own.)