
Oil prices to stay elevated even if a resolution is reached. Under our base-case scenario of a near-term resolution to the US-Iran talks and reopening of the Strait of Hormuz within 2Q26, we expect market conditions to normalise only gradually. Clearing the Strait of Hormuz of mines could take up to six months after the conflict formally ends, and mine-clearing operations are unlikely to begin until a comprehensive deal is in place. Any residual risk is sufficient to prevent insurance markets from underwriting shipping through the Strait. Without this, commercial operators will not send vessels regardless of the political situation on the ground (ceasefire or deal). This means that even in our base scenario, the realistic timeline for full traffic normalisation has extended materially. We now think full normalisation of Strait of Hormuz traffic is realistically an end-2026 story rather than a next quarter story. Add to this, the production losses and reservoir damage in the Gulf countries, which are likely to persist even longer. Under such a scenario, we now expect Brent to average between USD85-90/bbl in 2026 (up from USD62-67/bbl forecast at the start of the year) and USD72-77/bbl in 2027 (up from USD65-70/bbl forecast).
US shale – stable beneficiaries of recurring geopolitical disruptions rather than rapid responders. The US shale industry has matured. Instead of materially lifting capex and aggressively drilling amid an oil price upturn, producers are trying to maximize returns from existing rigs through efficiency gains and tactical calls like lower hedging. Geopolitical shocks now channel more into higher free cash flow, buybacks and export monetisation than into runaway drilling growth. EOG Resources, for example, will re-allocate capital towards oil-heavy assets instead of increasing capex. Diamondback Energy was more constructive than peers on adding rigs but still limited itself to a modest 5% capex increase. Producers will also benefit from the structural surge in demand for alternative sources of LNG and natural gas liquids (byproducts of shale oil & gas) like ethane and LPG, with more volumes and long-term contracts likely to be inked for export markets.
What is the market pricing in currently? US shale oil proxies present a cleaner play on elevated oil price environment than global oil majors yet share prices have only re-rated mildly (around 10%) since the crisis broke out. Compared to the 50% rise in oil prices, we think this is quite conservative, likely affected by flight of capital to the tech sector, where the AI theme continues to play out strongly, blocking out noise from elsewhere. We expect rotational interest in the energy space to revive sooner than later, especially if the US-Iran negotiations are extended even further and upside oil price risks are magnified.
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