Oil prices to remain elevated but volatile amid supply constraints: Analyst

Oil Above $100: Supply shock, inflation spillovers and the fragile demand outlook

 

Crude oil prices continue to hover above the psychologically significant $100/b mark, with benchmark prices posting weekly gains of nearly 7 per cent. On a year-to-date basis, prices have surged close to 77 per cent, largely driven by the ongoing US–Iran conflict that began on February 28, 2026, and remains unresolved. What initially appeared as a geopolitical disruption has now evolved into a full-fledged macroeconomic shock, with spillovers visible across inflation, interest rates, and global liquidity conditions.

 

The inflationary impact of elevated energy prices is becoming increasingly evident across major economies. In the United States, the energy index rose by 3.8 per cent in April alone, accounting for over 40 per cent of the total monthly increase in consumer prices. On a year-on-year basis, energy prices are up 17.9 per cent, significantly outpacing broader inflation metrics. Notably, inflation in April increased faster than wage growth, intensifying affordability pressures on already strained consumers.

 

 

The April 2026 Consumer Price Index release delivered a major surprise to financial markets, with core inflation rising to 2.8 per cent year-on-year. This stronger-than-expected print triggered a sharp repricing in fixed income markets, pushing the 10-year US Treasury yield to 4.47 per cent—its highest level since July 2025—while the 30-year yield breached the 5 per cent threshold. Rising yields have, in turn, strengthened the US dollar, placing downward pressure on emerging market currencies and tightening global financial conditions. The convergence of elevated inflation, higher borrowing costs, and currency volatility is increasingly acting as a drag on global demand. 

Global supply shock: A historic disruption

On the supply side, the magnitude of disruption has been unprecedented. According to the latest IEA data, global oil supply contracted by a cumulative 12.8 mb/d between February and April 2026, with April output falling to just 95.1 mb/d—a multi-year low. A significant portion of this decline stems from the Gulf region, where key producers including Iraq, Saudi Arabia, Kuwait, the UAE, Qatar, and Bahrain collectively shut in 10.5 mb/d of production in April alone as storage constraints and logistical bottlenecks intensified.

 

OPEC+ crude production dropped to 33.2 mb/d, marking a 35-year low, while OPEC output among quota participants declined to a record low of 19.6 mb/d. Meanwhile, flows through the Strait of Hormuz—one of the world’s most critical energy chokepoints—collapsed to approximately 3.8 mb/d in early April, barely one-fifth of normal throughput levels. This has severely disrupted global trade flows and triggered a sharp drawdown in inventories. 

Diverging demand outlook: IEA, EIA, and OPEC

Against this backdrop of constrained supply, the outlook for demand in 2026 varies significantly across major forecasting agencies, reflecting differing assumptions around geopolitical resolution timelines and price elasticity.

 

The IEA presents the most bearish view, projecting a contraction in global oil demand of 420 kb/d in 2026, bringing total demand to 104 mb/d—1.3 mb/d below pre-war expectations. The steepest declines are expected in Q2, with demand falling 2.45 mb/d year-on-year. Both OECD and non-OECD economies contribute to this weakness, with petrochemical feedstock shortages and aviation disruptions acting as key drags. Transportation fuels, including gasoline and gasoil, are also expected to decline modestly.

 

The EIA adopts a more moderate stance, revising its demand growth forecast down to just 0.2 mb/d for 2026, compared with 1.2 mb/d prior to the conflict. Under its baseline scenario, a gradual reopening of the Strait of Hormuz is assumed, though full normalization is not expected until later in the year. Even under this scenario, global inventories are projected to decline by 2.6 mb/d over the course of the year.

 

OPEC remains the least bearish, forecasting demand growth of 1.2 mb/d, supported by resilient consumption in emerging markets such as China and India. However, even OPEC acknowledges the downside risks posed by sustained high prices, tightening financial conditions, and geopolitical uncertainty.

US inventory dynamics: Cushion eroding

The United States entered the crisis with relatively tight inventory buffers. Strategic Petroleum Reserve (SPR) levels remained modest, with days-of-supply hovering around 43–44 days entering 2026. While SPR holdings edged up from 413 mb in December 2025 to 415 mb in March 2026, the onset of hostilities triggered significant drawdowns across commercial inventories. 

Week Ending	US Crude Stocks (mb)	Weekly Change	Gasoline (mb)	Distillates (mb)
24-Apr-26	459.5	−6.2 mb	222.3	103.6
01-May-26	457.2	−2.3 mb	219.8	102.3
08-May-26	452.9	−4.3 mb	215.7	102.5

 

Source: EIA Weekly Petroleum Status Report, weeks ending 24 April – 8 May 2026

 

In addition, inventories at the Cushing hub fell by 1.7 mb in early May, underscoring tightening supply conditions at the delivery point for WTI crude. Refinery utilization remains elevated at 90.1 per cent, with gasoline production at 9.6 mb/d. Retail gasoline prices surged to an average of $4.30 per gallon in April, with regional spikes exceeding $5.00. These elevated prices are expected to persist, with the EIA projecting a full-year average above $3.70 per gallon.

 

OECD inventories: Rapid depletion

 

Global inventory buffers are now eroding at a rapid pace. As of March 2026, total observed inventories stood at 8.2 billion barrels, with OECD countries accounting for approximately half of the total. However, accelerated drawdowns have significantly reduced these buffers. 

Period	OECD On-Land Draw	Global Observed Draw	Draw Rate
Mar-26	85 mb (global)	85 mb	2.8 mb/d
Apr-26	146 mb (OECD only)	170 mb on land	5.7 mb/d
Mar–Apr Cumulative	231 mb	250 mb (incl. oil on water)	4.0 mb/d avg

 

Source: IEA Oil Market Report, April & May 2026

 

At current draw rates, the sustainability of inventory buffers remains a growing concern, particularly if disruptions to Hormuz persist. Even strategic reserves, including government-held stocks, would provide only a limited cushion in the event of a prolonged supply shock.

Emerging markets under pressure

The demand outlook is particularly vulnerable in emerging markets, where high energy prices are exacerbating inflationary pressures and currency depreciation. India, for instance, saw crude imports fall to an eight-month low of 4.5 mb/d in March, while China imports dropped from March’s 49 million tons to 39 million tons in April.

Price outlook: Elevated but volatile

In the near term, oil markets remain pulled between tightening supply fundamentals and expectations of an eventual geopolitical breakthrough. Brent averaged $117/b in April, with intramonth peaks touching $126/b. Looking ahead, the EIA projects some moderation toward $106/b in Q2, followed by a softer trend in the latter half of the year, assuming a phased recovery in disrupted supply. 

 

That said, even if a US–Iran agreement materialises, any correction is likely to be sharp but short-lived, as operational and logistical bottlenecks in normalising flows through the Strait of Hormuz—typically requiring 6–8 weeks—should cushion the downside and support a rebound toward the $115–120/b range.

 

At the same time, deeper structural constraints around spare capacity, alongside elevated geopolitical risk premiums, suggest prices will remain above pre-conflict levels. The UAE’s exit from OPEC has further complicated the supply outlook, with the group’s spare capacity now expected to average just 2.5 mb/d by 2027. This significantly reduces the market’s ability to absorb future shocks, keeping the overall price bias tilted to the upside despite near-term volatility.

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