Opinions

Last week we have seen Brent inching north of $85 levels post the increase in escalations in Iran conflict. The latest escalation stems from Iran’s attempt to redefine the terms under which commercial vessels transit the Strait. Tehran appears intent on establishing authority over navigation itself through mandatory transit protocols and transit fees. Oman responded by opening a US-backed corridor along its coast, enabling stranded vessels to leave. When several ships attempted to transit without complying with Iran’s requirements, Iran struck commercial vessels off the Omani coast to reinforce its position. The US responded by reinstating sanctions on Iranian oil exports, resuming a blockade of Iranian ports & daily aerial attacks on Iran in the night. We believe crude oil and refined product net exports including the effect of rerouting stood at 50% and 20% of pre-war levels during the first week of the new phase. Aggregate total oil net exports at 45% of pre-war levels (including rerouting) so far in this new phase compare with averages of 31% in the initial escalation phase and 35% in the negotiation phase, indicating that there has been some progress in loosening Iran's hold over the strait. In absolute terms, middle east export numbers stood at 8.4 mb/d for crude oil and 1.0 mb/d for refined products. We see larger issue with refined product's supply than crude itself. Right now the market is short about 2.5 mbd of Middle East product supply. Add to that the Russian refinery issues where refinery runs have slipped to 3.3 mbd from 3.8 mbd last week, and are 2.0 mbd below last year’s levels, further tightening an already fragile global product balance. The strain is most visible in diesel: exports are now close to zero, down nearly 800 kbd from a year ago. Last week we read the bipartisan Russia sanctions bill which if gets passed, might further adversely impact the refined product balance. To us the shock is increasingly becoming a refining story rather than simply a crude supply story. On the larger picture, do we believe the current conflict is a forever war? We don't think so. We continue to believe both sides are negotiating rather than seeking a prolonged confrontation. Iran’s main objective is no longer to restore the status quo ante. Control over Hormuz offers both strategic deterrence and a recurring source of economic leverage. But Tehran risks overplaying its hand: If it continues to squeeze, it will lose strategic leverage — not immediately, but over the next five years or so as its neighbours build more bypass routes. By striking oil tankers off the coast of Oman, it has convinced every one of the Persian Gulf states, as well as oil importers including deep-pocketed nations such as China and Japan, that the only way to guarantee future oil flows is to invest billions of dollars in new pipeline capacity. We continue to believe in the range of 75-85 for Brent in REMCY26 & Brent falling gradually to 50 levels by H1CY27 and possibly sub 50 too in H2CY27 as alternate supply routes come online & global demand remains weak.

Aluminium prices have corrected by almost 20% from their recent highs. Price action looks extreme bearish for now, but we believe the bull market for producer margins & price is yet not completely broken. Aluminium remains bullish in the macro and geopolitical wings, with additional risks around bauxite supply. As such, it is not an especially attractive bear trade from current levels. Aluminium works in the wings – whether through renewed geopolitical disruption or a more dovish macro backdrop. We see prices bottoming over the coming month or so and recovering into September–December towards $3,300/t from current $3,090/t and possibly $3,500/t by March’27. But if there is a Russia Ukraine deal any time soon then premiums might reduce though modestly bullish for LME Aluminium.

In our past publications released on 22nd March as well as 31st Jan we have been consistently bearish on both Gold & Silver. Since then, Gold has fallen to 4000 odd levels and Silver at 55 odd levels. We continue to remain unconvinced by many US bank’s stories of Gold seeing 5000 odd levels any time soon. At least till Sep’26 we remain bearish on both Gold & Silver and do not have any optimism on their prices. We believe that US macro data is likely to remain strong till Sep which implies rate hike probabilities wont be faded away and DXY is likely to remain bid. Both these imply a weak set up for precious metals. If hikes do materialize (and especially if such hikes are perceived as more hawkish than warranted by the data), demand for gold as a macro policy hedge could unwind more persistently as market concerns about DM central bank independence ease further. Combined with rate-sensitive ETF holders net selling into higher rates, gold prices could then reach $3,600/toz by Dec’26. This assumes a total of 50 bps hike by Fed till Dec’26 against current expectations of 32 bps of hike. With only 25 bps of hike by end CY26 we might see gold stabilising between 4000-4400 levels by end CY26. We have always been of the view that the price history of precious metals over the past two decades suggests that strong rallies, such as the one from September 2022 to January 2026 when gold gained 245%, are followed by substantial declines, even if the bulk of the gains are consolidated. Amongst the 3 factors which drove Gold prices significantly in the last bull run, only one factor still remains which is global central bank's purchases. The other two factors: 1) strong retail demand by buyers in China & India wont recover in the short term due to higher margin requirements as well as higher import duties 2) Debasement trade is nearing its end. With US Iran ceasefire deal being announced, Gold’s demand as safe haven has reduced. Even trade war fears are now minimal thus reducing the risk premium on Gold prices. To summarise, we remain unconvinced by Gold/Silver rebound theories based upon only one factor of global central bank demand. US data is likely to remain strong till Sep which implies rate hikes won’t be priced away and hence precious metals best case scenario is consolidation only around current levels +/-10%.

Spot Brent futures prices slipped below $80/bbl last week as the US and Iran reached an interim deal that would lift the US blockade and reopen the Strait of Hormuz. The interim deal reportedly includes a waiver for exports of Iranian oil and petrochemicals and for related financial and transportation services, potentially unlocking over 50mb of Iranian oil on water overhang for immediate delivery. We now assume that Persian Gulf exports normalize to pre-war levels by end of July and Persian Gulf crude production recover by October. We estimate that this normalization in Gulf exports to pre-war levels might be achieved with a 13mb/d increase in Hormuz flows from current levels to around 70% of pre-war levels. CENTCOM reported that 55 commercial vessels recently transited the waterway in a single day, carrying more than 17 million barrels of crude oil and cargo to global markets. That is far bigger than the 13 mb flow required through SoH to reach prewar levels. We also do not see ship availability as a binding constraint on the recovery of flows as we estimate 860mb of empty tanker capacity within the Strait or within 5 days of navigation. What is more revealing is the IEA recent report for CY27 demand supply estimates. As per IEA, 2027 balances show a significant overhang emerging next year. Global oil demand is projected to rise by a relatively modest 2 mb/d to 105.3 mb/d. By contrast, oil supplies look set to surge by around 8 mb/d to 110 mb/d. That is a deficit of 5 mbpd for most of CY27. While the recent resumption of crude flow through SoH might be utilised to fill in the inventory drawdowns of 360 mbs globally (4mbpd for 3 months), we expect the gulf supplies to pick up sharply and fill in the inventories and SPRs by end CY26. This implies a price range of 75-90 for REMCY26. What is more interesting is CY27 where we see global supplies far outstripping the global demand by minimum 5 mbpd as alternate supply routes continue along with increase in production from non-OPEC countries such as UAE, Brazil, Canada. Hence, we see Brent falling gradually to 50 levels by H1CY27 and possibly sub 50 too in H2CY27. Above estimates factor in a permanent US Iran deal after the 60 days expiry period of the current MoU.

Even as the Iran conflict has completed more than 3 months, crude prices have been remarkably calm. If were asked in Jan that where do we see Brent if SoH (Strait of Hormuz) was closed for 3 months, our answer will have been north of $120. So why this divergence between analyst expectations and the real market. And how long this divergence can continue if SoH does not open up. As for the first question of why, the following are the reasons we can think of: 1) actual supply losses are lower than reported 2) demand losses are higher than estimated. On the supply side, we estimate around 1.5-2 mbpd of crude being still supplied by dark ships. We also see increased supply from US, Brazil & Venezuela. On net, we estimate that incremental non-Gulf supply added about 2.1 mbd in March and 2.4 mbd in April, nowhere near enough to replace the roughly 16 mbd of lost Middle East oil supply. On the demand side, China has absorbed a disproportionate share of the adjustment in May. China slashed its crude imports by 3.8 mbd compared to year-ago levels, accounting for roughly 74% of the remaining decline in global crude imports relative to the 2025 average—effectively taking the hit and allowing other countries to stabilize their intake. Also observed global oil inventories, including crude and products, have fallen by 4.6 mbd, an absolute drop of about 450 million barrels. Given the pace of draws, we still expect inventories to reach stress levels somewhere in late June, with operational floor levels approached by September. Preliminary consumption data suggest demand fell by 1.9 mbd versus year ago levels—well beyond the 0.6 mbd decline most of the analysts had pencilled in, given that physical supply was still landing. Going forward there could be demand declines of 3.0 and 4.2 mbd year-over-year, respectively, corresponding to demand destruction of 4.9 and 5.6 mbd. Hence, if SoH does not open by June, Crude can’t remain calm for ever. In such a scenario, we see Brent 120 by Sep & 150 by Dec’26 irrespective of above-mentioned supporting factors.

Between the Trump's tweets on Strait of Hormuz being open along with Iran's foreign ministry assertion that as long as US military blockade continues, SoH remains shut for all practical purposes. Today we have not seen any increase in SoH traffic. In fact there has been many U-turns of ships trying to cross SoH. So, while a deal appears to be in sight that may bring an end to the current round of US-Iran hostilities and relief to energy markets, it’s unlikely to result in a full or lasting peace. Israel does not appear party to negotiations and continues to regard Iran as a threat. Trust between the US and Iran remains low and already there appears to be different interpretations of key terms (e.g., Hormuz), all pointing to enduring tensions. Today we are witnessing Iran’s move to restrict vessel traffic through the Strait of Hormuz in response to the continued US naval blockade, undermining expectations of an imminent peace deal touted by Trump. We believe there are various threats to the market assumptions of a near term deal. These risks can be categorised into Israel, Trump himself, SoH traffic conditions & fundamental differences in Iran & US positions on Iran's nuclear facilities. We also believe Iran's neighbours namely UAE, Kuwait, Bahrain and to an extent Saudi do not want an Iran toll on SoH traffic. The current events can escalate further if Iran asks Houthis to attack vessels transiting the Bab al-Mandeb Strait, the southern exit route from the Red Sea and one of the two exits that Saudi Arabian crude exports can currently take. We continue to expect Brent in the range of $85-120 for next few weeks. We definitely do not see Brent sustaining below $85 as crude prices might be supported by purchasing for strategic reserves, a focus on resource nationalism and hoarding, and the logistical lags caused by the disruption.