Morgan Stanley has cut its oil price forecasts for the second half of 2026, citing a faster‑than‑expected return of flows through the Strait of Hormuz.
Bloomberg reported that the bank sees Brent crude averaging lower than previously projected as supply disruptions ease.
At the time of writing, the Brent crude contract on the Intercontinental Exchange was at $73.15 a barrel, down 1.0% from the previous close.
Forecast revisions
According to Bloomberg, Morgan Stanley now expects Brent crude to average $82 a barrel in the third quarter, down from its earlier forecast of $86, and $78 in the fourth quarter, compared with $82 previously.
West Texas Intermediate (WTI) is projected at $80 in Q3 and $76 in Q4, reflecting expectations of smoother shipping through Hormuz and a modest recovery in Iranian exports.
The bank’s analysts said the reopening of Hormuz has unfolded more quickly than anticipated, with shipping lanes clearing and insurance costs stabilising.
“Flows are returning faster than we thought, which reduces the geopolitical risk premium embedded in prices,” Morgan Stanley noted in its report.
Market reaction
Oil prices fell sharply after the announcement of the Hormuz deal earlier in June, with Brent slipping below $85 a barrel and WTI trading near $82.
Traders interpreted the agreement as a sign that geopolitical risk premiums, which had inflated prices since February, may begin to unwind.
Morgan Stanley’s downgrade aligns with similar revisions from other banks, including Citi and UBS, which have also trimmed forecasts amid expectations of easing supply constraints.
Goldman Sachs, however, has taken a slightly different view, projecting that Persian Gulf exports could normalize by late July but warning that volatility may persist.
Supply dynamics
The reopening of Hormuz, which handles about a fifth of global oil and liquefied natural gas shipments, is expected to restore confidence among refiners and traders.
Bloomberg noted that shipping activity has picked up, with several tankers already completing voyages through the strait under new security guarantees.
Morgan Stanley cautioned that logistical challenges and insurance costs could persist, slowing the pace of recovery. Still, the bank emphasized that the faster return of flows has materially changed the outlook for the remainder of 2026.
Demand outlook
Beyond supply, demand trends remain mixed.
Chinese crude imports have been weaker than expected, while US production growth continues to add barrels to the market.
“Demand growth remains tepid, and inventories are sufficient to absorb short‑term shocks,” Morgan Stanley said.
The bank expects oil prices to remain range‑bound through the summer, with Brent fluctuating between $78 and $85 as traders gauge progress on the Hormuz reopening.
Analysts see limited upside unless global demand strengthens or supply disruptions re‑emerge.
Broader implications
The downgrade underscores how quickly sentiment can shift in energy markets. Just weeks ago, traders were bracing for prolonged shortages and elevated risk premiums.
Now, with flows returning faster than expected, the focus has shifted to demand weakness and the potential for oversupply.
The deal could have ripple effects across other commodities.
Natural gas and refined product markets may see improved flows, while shipping rates could stabilise as insurers reassess risk exposure.
Still, analysts warned that any setback in implementing the agreement or renewed hostilities could quickly reverse the recent price declines.
Morgan Stanley’s forecast cut reflects a market in transition: geopolitical risk premiums are fading, supply is normalising, and demand remains uncertain.
While the reopening of Hormuz marks a significant diplomatic breakthrough, its economic impact will depend on how quickly confidence returns to shipping and energy markets.
For now, Wall Street’s consensus points to softer prices in the second half of 2026, with Morgan Stanley urging caution and Goldman Sachs highlighting the potential for volatility.
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