Fitch: Middle East Tensions Drive Oil Prices, But Surplus Expected in 2026

Despite ongoing geopolitical tensions in the Middle East that have pressured oil prices upward, Fitch Ratings anticipates a more tempered outlook for crude oil in 2026. In a recent interview with CNN Business Arabic, the agency projected an average Brent crude price of $70 per barrel for the year, even as current market conditions reflect heightened volatility. This assessment suggests that recent price surges, driven by regional instability, may prove temporary, with underlying market fundamentals pointing towards a supply surplus.

Geopolitical Risk Premium and the Hormuz Strait

The primary catalyst for the recent price increases, according to Angelina Valavina, Managing Director and Head of Natural Resources and Commodities for Europe, the Middle East, and Africa at Fitch, is the perceived risk of disruption to oil flows through the Strait of Hormuz. The Strait, a critical chokepoint for global energy trade, sees approximately 20 million barrels of oil and petroleum products pass through daily – roughly 20% of global oil consumption, as highlighted by Fitch (CNN Business Arabic). Around half of the oil traversing the Strait originates from Saudi Arabia and the United Arab Emirates, with the remainder coming from Iran, Iraq, and other regional producers. Similarly, approximately half of the volume is destined for China and India, underscoring the Strait’s central role in global energy markets.

Valavina emphasized that any disruption to navigation through the Strait is likely to be short-lived, as the interconnected economic and geopolitical interests at play make a prolonged closure improbable. This expectation is based on the belief that stakeholders will prioritize maintaining the flow of energy, even amidst broader regional conflicts.

Global Oil Stockpiles Offer a Buffer

Fitch’s outlook is also supported by substantial global oil inventories, exceeding 8 billion barrels. This significant buffer provides a cushion against temporary supply shocks, mitigating the potential for sustained price increases. The agency believes this ample supply will help to rebalance the market once geopolitical tensions ease and the risk premium dissipates.

Price Scenarios: A Range of Possibilities

While the base case scenario centers around a $70 per barrel average for Brent crude in 2026, Fitch has modeled several stress-test scenarios to assess the impact of prolonged supply disruptions. A three-month closure of the Strait of Hormuz, without a corresponding return of lost volumes to the market, could push the average oil price to $90 per barrel for the year. A six-month closure with a complete loss of supply could potentially drive the annual average price up to $120 per barrel. However, Fitch stresses that these scenarios represent extreme conditions.

Prior to the recent escalation of tensions, the oil market was already anticipating a supply surplus, with projected global supply growth of around 2.5 million barrels per day outpacing demand growth of less than 1 million barrels per day. This pre-existing condition suggests that the market has the capacity to absorb some level of disruption without experiencing a dramatic and sustained price spike.

Russian Oil: Re-Routed, Not Removed

Fitch also notes that Western sanctions have not eliminated Russian oil from the global market, but rather have redirected its flow to alternative destinations. According to Valavina, the majority of Russian oil exports have been rerouted to China, India, and Turkey, along with a limited number of other countries. The oil hasn’t disappeared from the market; it’s simply flowing through different trade routes, often at a discounted price due to the sanctions (MSN). The potential return of some of this Russian supply to the market at prices closer to global levels could influence market sentiment more than the actual supply-demand balance.

Natural Gas: A Different Dynamic

The agency differentiates the outlook for natural gas from that of crude oil. While the oil market faces a relative supply surplus, the natural gas market is experiencing a supply shortage. Europe is currently competing with Asia for liquefied natural gas (LNG), with Qatar and the United States serving as primary suppliers, alongside Australia. Continued geopolitical tensions or delays in LNG supply could lead to higher prices globally, potentially impacting energy-intensive industries like the chemical sector. This sector is particularly sensitive to energy costs, as gas is used both as a fuel source and as a feedstock in numerous industrial processes, potentially eroding profit margins and hindering economic recovery, especially in Europe.

Implications for Regional Economies

Despite the potential for oil price volatility, Fitch expects the Middle East to continue demonstrating strong economic performance in 2026, even with declining oil prices (Facebook). This resilience is attributed to economic reforms implemented across the region, which have helped to mitigate the impact of regional conflicts. The agency’s assessment suggests that proactive economic diversification strategies are proving effective in shielding Middle Eastern economies from external shocks.

What’s Next: Monitoring Supply and Demand

The coming months will be crucial for monitoring the evolution of the situation in the Middle East and its impact on oil markets. Key factors to watch include the duration of any disruptions to oil flows through the Strait of Hormuz, the response of OPEC+ to changing market conditions, and the trajectory of global economic growth. Fitch will continue to assess these factors and update its forecasts accordingly. The agency’s next scheduled review of its oil price outlook is in June 2026, coinciding with the OPEC+ meeting. Further analysis will also focus on the evolving dynamics of Russian oil exports and the impact of sanctions on global supply chains.