Geopolitics, Shifts in Demand Shape Future of Oil Prices

Oil Prices Plummet Amid Ongoing Conflict in the Middle East

The ongoing conflict between the United States, Israel, and Iran has sent oil prices soaring, with Brent crude oil prices jumping from $67 per barrel on 27 February 2026 to $105 per barrel by the end of March. However, as signs of the war drawing to a close began to emerge, the price of Brent crude oil settled in the range of $80 to $85 per barrel by 17 April 2026. The prices jumped again to nearly $90 following renewed war threats on 20 April, with some experts predicting that crude oil prices could reach $150 per barrel.

Understanding the Complex Dynamics of Oil Prices

The determination of oil prices has always been complex, with the price of crude oil being determined by the forces of demand and supply. The current oil price shock is being felt across multiple fronts, with the market reshaped by both 'demand destruction' and 'supply disruption'. Earlier, demand for crude oil was relatively price inelastic, and price increases imposed heavy costs on countries like India. However, with sustained higher prices, the phenomenon of demand destruction is now emerging.

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The Mechanics of Demand Destruction

At approximately $100 per barrel, early signs of demand destruction are already visible. This occurs through the purchasing power (real income) effect, substitution effect, and industrial retrenchment.

Supply Disruptions and Market Response

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On the supply side, the market faces significant risks if the Strait of Hormuz remains blocked. Potential disruptions include Saudi Arabia losing 2.5 million barrels per day, the UAE another 2.5 million, and combined losses of around 3 million barrels per day from Qatar, Kuwait, and Bahrain. Iraq could lose nearly 2 million barrels per day, and Iran around 2 million barrels per day. This amounts to a total disruption of roughly 11 to 11.5 million barrels per day.

At the same time, higher prices stimulate additional production. The United States could increase output by around 2 million barrels per day, Venezuela by about 0.5 million, and Russia by 1.5 to 2 million. Canada and other producers could collectively add around 2 million barrels per day. In total, price-induced supply increases could reach 8 to 9 million barrels per day.

Future Scenarios for Oil Prices

Over the next 6 to 12 months, two scenarios appear most likely. If the Strait of Hormuz remains blocked, oil prices may stabilise around $70 to $75 per barrel. If supply normalises, prices could fall towards $40 to $50 per barrel. However, if prices drop below the production cost of U.S. shale, output reductions may prevent prices from falling too sharply.

Conclusion: A Self-Correcting Market

The key takeaway is that the market is entering a phase where today's high prices are creating the conditions for lower prices tomorrow. Therefore, when forecasting economic growth in India and globally, it is important to recognise that oil prices are unlikely to remain above $75 per barrel for long, reducing the risk to economic growth from sustained high energy costs.