The prolonged closure of the Strait of Hormuz will leave a portion of Middle East oil production shut in through at least the end of next year, according to the U.S. Energy Information Administration's (EIA) latest Short-Term Energy Outlook (STEO) published this week. The Strait is one of the world's most critical oil transit chokepoints, typically carrying roughly a fifth of global oil consumption, so even partial disruptions to its traffic have outsized effects on energy markets and inventory levels worldwide.

Renewed tensions in the Middle East that erupted in late July and have continued to simmer throughout August are expected to keep traffic through the Strait of Hormuz severely constrained for the remainder of this month. The resulting reduction in supply is projected to further deplete global oil inventories, prompting the EIA to raise its third-quarter oil price forecasts.

The administration currently anticipates that oil flows through the Strait of Hormuz will begin to slowly recover in September, with regional production shut-ins easing accordingly. Most Middle East crude production is expected to return to near pre-conflict averages by early 2027. Nevertheless, the EIA estimates that approximately 600,000 barrels per day (bpd) of output will remain offline through the end of 2026.

This projection rests on the assumption that Hormuz shipments will stay severely restricted through August before gradually increasing the following month.

The EIA does not, however, expect that Houthi threats to vessels transporting Saudi crude through the Bab el-Mandeb Strait — the chokepoint at the mouth of the Red Sea — have caused any additional production shut-ins.

"If these assumptions hold, we expect it will take until early 2027 for production and trade patterns to generally return to pre-conflict status," the EIA stated in its monthly outlook released on Tuesday. "We anticipate nonetheless that some producers around the Persian Gulf will not be able to bring oil output back to pre-conflict averages during the STEO forecast period."

According to EIA estimates, shut-ins among Middle East producers averaged 5.5 million bpd in July — nearly half the 10.1 million bpd average during the March–May period. Third-quarter shut-ins are now projected at 6.72 million bpd on average, an upward revision from the July STEO, as Hormuz traffic has dropped in recent weeks to its lowest level in more than two months.

The United Arab Emirates (UAE), which withdrew from OPEC on May 1, had fully restored its crude production as early as June. All other Gulf producers, however, still had portions of their supply curtailed as of July: Saudi Arabia by 2.3 million bpd, Iraq by 1.96 million bpd, and Kuwait by 1.05 million bpd. The disparity reflects, in part, the UAE's unique access to infrastructure that can route crude to the Gulf of Oman side of the Arabian Peninsula, effectively bypassing the Strait.

The UAE has succeeded in raising its oil exports back to pre-crisis levels by continuing to move crude through and around the Strait of Hormuz. The Abu Dhabi National Oil Company (ADNOC) has offered nearly 100 million barrels of crude via spot tenders since June and is increasing production to record levels. These gains have been achieved through several logistical workarounds: shuttling crude through Hormuz to transfer it onto larger vessels outside the Strait, maximizing use of an onshore pipeline to transport crude from west to east across the country and bypass Hormuz, and operating tankers through the Strait in dark mode.

The EIA projects that Middle East shut-ins will ease to 1.68 million bpd by the first quarter of 2027. While these volumes are expected to gradually decline, approximately 600,000 bpd could remain off the market through the end of 2027.

Reflecting the continued constraints at Hormuz, the EIA raised its forecast for the Brent crude spot price by $11 per barrel from its July outlook, and now expects Brent to average around $85 per barrel in the third quarter.

Early Wednesday in Asian trading, Brent was changing hands at approximately $89 per barrel, having risen over the week as prospects dimmed for U.S.–Iran negotiations on a deal to reopen the Strait of Hormuz. The widening gap between the EIA's forecast and the prevailing market price underscores the degree to which traders are pricing in the possibility of prolonged or worsened disruption beyond the agency's baseline assumptions.

The EIA cautioned that all such assumptions could be quickly upended if re-escalation or de-escalation in the region alters the oil flow picture once again — as has been the pattern over the past five and a half months.

By Tsvetana Paraskova for Oilprice.com

Source: OilPrice.com | EIA Short-Term Energy Outlook