Crude oil at $120/bbl? Mirae Asset Sharekhan explains why this is possible

Disclaimer: This article is written by Mohammed Imran, research analyst, Mirae Asset Sharekhan. Views expressed are his own. Readers' discretion is advised.

 The global crude oil market witnessed yet another change in the underlying dynamics after Yemen’s Iran-backed Houthis seized the strategic Red Sea port city of Mokha from Saudi-backed pro-government forces and are advancing to take full control of the southern gateway to a major trade route linking Asia and Europe on the coastline of the Red Sea. The move has sent crude oil prices to the highest level since May this year; Brent trades above $108, and WTI trades above $103, and both benchmarks have surged 23 per cent in September, along with gains of around 78 per cent YTD. The constraints at the Yanbu terminal (5 mb/d of export capacity) and threats of attacks in the Red Sea have reduced vessel availability for exports. War-risk insurance and freight costs have also surged. High transport costs weaken normal arbitrage and prevent surplus barrels in one region from reaching a deficit market quickly.

 

 

Global oil balance is tightening

The global supplied had remained short of around 10-11 million barrels during August and with The latest move from Houthis is just going to add to already depleting global reserves as the route of Red sea in its normal course would account for 60-70 ships moving a day that would include Oil flows from Russia heading for Asian markets, while Houthis have warns to hit ships from Saudi that would mean oil flows from Saudi Arabia which are at lowest in 40 year during August would be at major risk in coming months. Saudi Arabia told OPEC that its crude production in August fell to 6.238 million bpd, the lowest since 1990. Saudi Arabia's Aug crude exports dropped to about 3 million bpd, the lowest amount in 9 years. Global oil markets are continuing to tighten, with the loss of about 2 million bpd from crude exports in the Middle East, and a further 2 million bpd from Russia as a result of Ukraine’s drone attacks.

 

On the other side of the Red Sea is the Persian Gulf, where resurgence of strikes from Iran and the U.S. The Strait of Hormuz remains disrupted, and the conflict is now heading into its seventh month. At this moment, we believe that any discussion of a short-term deal to open up the Strait of Hormuz for commercial shipping is unlikely, as both sides have very little common ground.

 

Persian Gulf refining remains offline

The Strait of Hormuz closure and Gulf refinery damage continue to constrain both the oil and refined products markets.

 

The Hormuz traffic is not yet normalised as claimed by White House, although flow had improved in August to around 6 mbpd, but that would still be less than the normal routine outflow of 14mbpd oil at pre-war level. But during the temporary ceasefire in July, floating storage fell from 61 million barrels in mid-June to 16 million barrels within three weeks. Crude and condensate clearance from the Gulf averaged about 6.1 mb/d during the 30-days the ceasefire was truly in effect, but that improvement over the spring lows came mainly from releasing a tanker backlog.

 

Russia switched from supplier to importer!

The Russian Invasion of Ukraine remains a central driver of global product tightness. Ukrainian drone strikes have become broader, more frequent, and more effective against Russian refineries. Russian crude runs fell from more than 5 mb/d through much of 2025 to about 4.0 mb/d in July 2026 and 3.9 mb/d in August so far. This implies that 40 per cent of Russia's 6.7 mb/d refinery capacity is down, and it follows that refined product exports halved from about 2.3 mb/d in 2025 to roughly 1.2 mb/d in July. Diesel has taken the largest hit. Russian diesel exports dropped to roughly 0.2 mb/d in July, compared with about 1 mb/d before the war. Moscow imposed a broad gasoline and diesel export ban to protect the domestic market and, worst of all, has reportedly begun importing diesel. The export loss forces buyers in Turkey, Brazil and Africa to compete for replacement barrels from India, the Middle East and the U.S. Gulf Coast. That competition transmits the Russian shortfall into every major pricing region.

 

The global refining capacity bottleneck

The refined product exports from Persian Gulf countries excluding Iran collapsed from more than 3.3 mb/d in 2025 to just over 1 mb/d by April. The losses are concentrated precisely in clean products — diesel, jet fuel and gasoline. Roughly a third of the world’s aviation kerosene is refined in the Middle East, and the NW Europe jet fuel crack spread peaked above $121/bbl earlier this year, about four times the average spread. The loss of diesel supplies is partially met by the recent all-time highs in US product exports, along with improved runs from Asian refiners, but that would still see 4mpbd of refined product shortages to fuel the world. Outside of the U.S., total refinery capacity and throughput are another complicating matter. China slowed down crude imports by about 5 mb/d in April, May and June, which helped push the market down in late June’s “MoU Peace” to $70/bbl (Brent). Teapot refineries lost access to their major crude sources, and consequently shut down, as China cut export quotas sharply in March to protect domestic consumers. By May, exports were down about 40 per cent year over year.  Chinese exports increased to 6.01 mln tons in August as refiners capitalised on the crack spread opportunities in the export market.

 

Outlook

The average crude oil prices will stay significantly higher than the previous forecast, as the recent turn of events would shrink global inventories, slow global supplies, and would see Brent heading for $120/b in Q4, and the average Brent prices for 2026 would stay around $92/b. As Trump's campaign for the mid-term election intensifies, we could see news flow that could lead to a sharper correction, but that should be considered a long opportunity, as underlying supply would remain tight for at least six months.