Brent crude has recovered from recent lows near $91 per barrel after expectations for a swift agreement between the United States and Iran weakened, leading Citi analysts to reaffirm their constructive near-term view on oil prices amid concerns over tightening global inventories.
The latest rebound comes against a backdrop of ongoing tensions in the Middle East. Iran recently targeted Kuwait’s airport, while U.S. forces conducted operations near the Strait of Hormuz, highlighting the fragile nature of the ceasefire that has held for several weeks.
Diplomatic discussions between Washington and Tehran continue to face significant obstacles, with disagreements centered on the future of the Strait of Hormuz, the handling of Iran’s highly enriched uranium stockpile and whether Lebanon should be included in any broader ceasefire framework.
Although a separate ceasefire agreement between Israel and Lebanon announced on Wednesday raised hopes for wider regional stability, oil prices remained supported. On Thursday, Brent crude traded at $94.88 per barrel, while WTI stood at $96.65. Iran has repeatedly linked any potential agreement to a halt in hostilities involving Israel and Hezbollah.
Citi believes negotiations are likely to remain protracted rather than producing a rapid breakthrough. Its base-case scenario assumes shipping flows through the Strait gradually normalize during the third quarter, but low inventory levels and the need to rebuild stocks are expected to keep prices elevated for an extended period.
The bank forecasts Brent crude averaging $110 per barrel in the third quarter before easing to $90 in the fourth quarter and declining further to $80 in 2027. Analysts also expect backwardation to remain a feature of the market throughout this period.
A key element supporting Citi’s outlook is the uneven distribution of oil inventories worldwide. While aggregate global stock levels appear broadly in line with historical norms, inventories of crude and refined products in Asia excluding China had already fallen below their five-year averages by the end of May.
“Continued stock draws will take levels to recently unprecedented lows, causing a scramble to pull from better supplied areas, and strong backwardation to persist to replenish low stocks even after Strait reopening,” the analysts wrote.
According to Citi, two major developments have helped prevent a more severe tightening of physical oil markets despite supply disruptions that have effectively removed more than one billion barrels from the market since issues began in the Strait of Hormuz.
First, Chinese crude imports declined by approximately 4.3 million barrels per day between February and May. Second, the International Energy Agency’s emergency stock release programme supplied an estimated 3.3 million barrels per day during April and May.
However, Citi cautioned that conditions could tighten significantly once those emergency releases conclude, potentially as early as late July.
Refined fuel inventories remain another area of concern. Stocks of diesel, gasoline and residual fuels have already dropped below, or remain close to, the lower end of historical ranges, helping sustain elevated refinery margins despite recent volatility in crude prices.
The International Energy Agency echoed these concerns this week, warning that global inventories could fall to critically low levels ahead of the peak summer demand season if current stock drawdowns continue.