Crude outlook: Oil may head toward $112 on supply risks amid West Asia war

Crude oil prices rallied to a two-week high this week as geopolitical risks in West Asia returned sharply to focus, with the US and Iran trading fresh threats of military action. Attacks on vessels in and around the Strait of Hormuz, combined with stalled diplomatic efforts, pushed Brent crude futures above $106 a barrel, trading in the $105–107 range and posting weekly gains of nearly 18 per cent.

 

Tensions remain elevated as negotiations between Washington and Tehran appear deadlocked, with Iranian officials citing the US rhetoric and naval pressure as key barriers to progress.

 

US officials, meanwhile, have indicated little urgency to revive talks, pointing to mounting constraints on Iran’s oil exports and storage capacity. Political strains within Iran have also intensified, with the resignation of Tehran’s chief negotiator amid reported internal interference. Against this backdrop, media reports suggest the US military is reviewing contingency plans to protect shipping lanes, raising concerns of a broader supply disruption.

 

 

Supply shock: Production stalls across OPEC producers

 

The ongoing war has triggered the largest oil supply disruption in history. The International Energy Agency (IEA) estimates that roughly 10 million barrels per day (bpd) — about 10 per cent of global supply — was taken offline in the Persian Gulf region by mid-March due to the near-total closure of the Strait of Hormuz and attacks on energy infrastructure.

 

OPEC members saw crude production plummet 27 per cent month-on-month (M-o-M) in March to under 21 million bpd, with the steepest declines in Iraq, Saudi Arabia, Kuwait, and the UAE. Gulf exporters slashed output as storage filled and exports choked, forcing involuntary cuts despite earlier quota plans.

 

OPEC+ responded with a symbolic increase of 206,000 bpd in quotas for May, largely on paper, given the shipping paralysis. Damage to infrastructure suggests a slow recovery, even if hostilities ease, prolonging the supply tightness

 

Russia’s production and exports in March

 

Russia's crude production edged up modestly to approximately 8.96-9.17 million bpd in March from February levels, according to IEA and OPEC data, though it remained below full OPEC+ quotas and showed underlying capacity constraints from prior maintenance and attacks on infrastructure.

 

Total oil exports (crude and products) rose to around 7.1 million bpd, up 270,000-320,000 bpd month-on-month (M-o-M), aided by higher seaborne shipments following temporary US sanctions waivers and elevated prices. China and India remained the biggest buyers during the period. Indian imports from Russia remained at a higher level above 2mbpd, but the country's imports plunged to an average of around 4.5mbpd in March as the Indian crude oil basket averaged around $113/b, up from $72/b of February. However, Russia’s gains remain secondary to the massive West Asia shortfall and cannot fully offset the global tightness.

 

US crude inventory data

 

The US Energy Information Administration’s (EIA) latest Weekly Petroleum Status Report for the week ending April 17, 2026, showed commercial crude inventories (excluding Strategic Petroleum Reserve) rising by 1.9 million barrels to 465.7 million barrels — about 3 per cent above the five-year seasonal average.

 

Refinery inputs averaged 16.0 million bpd, slightly down week-on-week, with utilization at 89.1 per cent. These builds indicate that the US shale output and strategic releases have helped cushion domestic markets, keeping WTI somewhat insulated compared to Brent (with the Brent-WTI spread widening notably).

 

Demand destruction in March, April

 

Economic slowdown risks from the conflict amplify this, turning what began as a supply shock into a dual supply-demand imbalance. Global PMIs Signal Stagflation: April PMIs paint an increasingly stagflationary pressure. The euro area was the clear laggard, with the composite PMI slipping into contraction, down 2.1pts to 48.6. IEA Warns of Sharp Contraction High prices and supply scarcity are already triggering demand destruction.

 

The IEA revised its 2026 outlook sharply downward, now projecting a contraction of 80,000 bpd for the full year (versus prior growth expectations of 640,000-730,000 bpd). March saw an estimated 800,000 bpd year-on-year (Y-o-Y) drop in global demand, accelerating to a potential 2.3 million bpd decline in April and this could get worse with the risk of stagflation gripping the world economy.

 

Crack spreads surge: Implications for Refiners and Downstream Refinery margins have expanded dramatically amid the volatility. The 3-2-1 crack spread (a key proxy for US Gulf Coast margins) has skyrocketed, reaching levels above $50-55/bbl in recent weeks — far exceeding historical averages of $10-20/bbl — as refined product prices (especially distillates) outpaced crude gains in certain windows. Distillate cracks have been particularly strong, reflecting tight middle-distillate balances. However, prolonged crude tightness could eventually squeeze runs if product demand weakens further due to destruction. For consumers, wider cracks translate to elevated gasoline and diesel prices, feeding into inflation and further dampening economic activity.

 

Outlook: Fragile balance amid uncertainty

 

The crude oil market remains on a knife-edge. Brent’s surge above $105 reflects genuine supply risks from Hormuz disruptions, yet US inventory resilience and emerging demand weakness provide some counterpressure. Russia’s March rebound offers limited relief, while OPEC’s involuntary cuts dominate the narrative. Crack spread strength highlights downstream profitability but signals broader economic strain.

 

Prolonged conflict risks deeper demand destruction and slower supply recovery. We see near-term upside risks to $112+ if escalations continue.

 

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(Disclaimer: This article is written by Mohammed Imran, research analyst, Mirae Asset Sharekhan. Views expressed are his own.)