Brent seen at $95-115; supply deficit to keep prices elevated: Analyst

The global oil market is increasingly reflecting second-order effects of the US-Iran conflict, now in its 73rd day, following Iran’s effective closure of the Strait of Hormuz on February 28. What began as a geopolitical disruption has evolved into a structural supply shock, with visibly tightening inventories, elevated price volatility, and mounting macroeconomic consequences. 

 

Brent crude, which ended February at $77/bbl, surged to an intraday high of $138/bbl in April—the largest monthly increase on record—and remains elevated near $106/bbl in mid-May despite a ceasefire episode. The persistence of high prices underscores that supply risks remain unresolved and structurally embedded.

 

Russia sanctions: A critical shock for India

A second major disruption emerges from the expiration of the US Treasury’s sanctions waiver on Russian crude on 16 May. This waiver had allowed global refiners, including Indian entities, to process Russian cargoes loaded before April 17. With the waiver now lapsing, Indian refiners—particularly private players such as Reliance Industries and Nayara Energy (49 per cent owned by Rosneft)—face direct exposure to secondary sanctions.

 

Russia has accounted for approximately 33 per cent of India’s crude imports in FY26, making substitution a key challenge. Even replacing half of these volumes at non-discounted prices implies an additional $6–8 billion annual import bill. State refiners such as Indian Oil Corporation (IOCL) and Mangalore Refinery have already paused Russian purchases, while Nayara continues imports. In the absence of an extended waiver, India is expected to accelerate diversification toward Brazil, Guyana, Venezuela, and US WTI, albeit at higher costs and logistical complexity

Inflation dynamics: Uneven energy pass-through

The inflationary impact of higher oil prices is increasingly visible, though uneven across economies:

• United States (April 2026 consumer price index (CPI): 3.8 per cent year-on-year (Y-o-Y), +50 basis points (bps) month-on-month (M-o-M): Energy inflation surged to +17.9 per cent Y-o-Y, with gasoline up 28.4 per cent, reflecting full pass-through.
• China (1.2 per cent Y-o-Y, +20 bps): Producer prices rose 2.8 per cent, the highest since July 2022, indicating upstream cost pressures.
• India (3.48 per cent Y-o-Y, +8 bps): Inflation remains muted due to controlled retail fuel prices.

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Unprecedented inventory drawdown

The most critical signal of stress lies in global inventories. According to estimates, global crude and product stocks have fallen from 8.6 billion barrels pre-conflict to 8.1 billion barrels, implying a massive 500–600 million barrel supply deficit.

 

Between March 1 and April 25, the market experienced an average drawdown of 4.8 mb/d, the steepest quarterly decline on record, with expectations of 8.5 mb/d drawdowns in Q2 2026. March alone recorded an 85 million barrel decline, while stocks outside the Gulf dropped by 205 million barrels.

 

On a weekly basis, this translates to 80–100 million barrels of depletion, highlighting the intensity of the ongoing imbalance.

Demand destruction: Concentrated in Asia

High prices are beginning to erode demand, particularly in Asia. The EIA has sharply downgraded 2026 global demand growth from 1.2 mb/d to just 0.2 mb/d, implying 1 mb/d of demand destruction.

 

China has been the most significant contributor, with crude imports falling 20 per cent Y-o-Y in April, as refiners drew on approximately 1 billion barrels of domestic inventory rather than import costly crude.

 

India’s picture is more nuanced. Russian imports surged to 2.25 mb/d in March, supported by sanctions flexibility. However, Middle Eastern imports collapsed 61 per cent to 1.18 mb/d, reducing Opec’s share in India’s basket to a record low of 29 per cent.

Strategic reserves: Limited sushion remaining

Global buffers are being rapidly depleted. The IEA coordinated a 400-million-barrel release in March, including 172 million barrels from the US SPR. Despite this, US SPR levels remain near 409 million barrels, sharply below historical norms.

Globally:

• US commercial crude inventories: 457 million barrels
• China: 360 million barrels (strategic) + 1 billion commercials
• Japan: 535 million barrels combined
• IEA projections suggest that global inventories will continue declining through 2027, even under partial conflict resolution scenarios.

Opec+ Dynamics: Limited real spare capacity

Opec+ approved a modest June increase: Saudi Arabia +62,000 bpd to 10.29 mb/d, Russia +62,000 bpd to 9.76 mb/d. The bigger structural news was the UAE's exit from Opec effective 1 May — Abu Dhabi will use its 4.8 mb/d capacity unconstrained by quotas once Hormuz reopens. Headline Opec+ spare capacity is officially 4–5 mb/d, but Energy Aspects and Rapidan estimate true deployable spare capacity at just 1.5–2.5 mb/d — overwhelmingly Saudi and Emirati. With 9.1 mb/d shut in at the April peak, the cartel has been a price-supporter, not a supply-stabiliser.

India’s macroeconomic exposure

India faces significant vulnerability due to its 85 per cent dependence on crude imports. Each $10/bbl increase in oil prices:

• Worsens the CAD by $15 billion (0.4–0.5 per cent of GDP)
• Raises CPI inflation by 35–40 bps
• Reduces GDP growth by 20–25 bps
• If Brent averages $120/bbl in 2026, India’s growth could slow by up to 70 bps, bringing FY27 GDP growth to 6.4–6.6 per cent. With Brent already averaging $110 since March, the risks are increasingly material. India’s FY26 CAD has widened to 1.1 per cent of GDP and could approach 1.5 per cent in FY27 absent de-escalation.

Outlook: Tight markets and elevated price floor

The outlook remains structurally tight. Even under an optimistic scenario where the conflict resolves by mid-to-late June, normalisation of traffic through the Strait of Hormuz could take 6–8 weeks, with flows recovering to only 80 per cent of pre-war levels initially.

 

Given ongoing inventory depletion of 80–100 million barrels per week, Brent is likely to remain supported in the $95–115/bbl range. Any renewed escalation or prolonged disruption could push prices decisively above $120/bbl, establishing a higher structural ceiling.

 

Conclusion: The global oil market is transitioning from a cyclical shock to a structural supply deficit regime. Tight inventories, constrained spare capacity, and geopolitical fragmentation suggest that downside risks are limited, while upside risks remain significant—particularly for oil-importing economies like India.

 

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