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Ulviyya Poladova

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The global oil market has entered another period where geopolitics is setting the tone, while weaker demand and rising inventories are trying to pull prices back down. That tension between physical risk and economic reality is what now defines the market.

After the June peace agreement between the United States and Iran, oil markets temporarily relaxed. Brent crude fell to around $69 per barrel on July 2, reflecting hopes that supply risks in the Gulf might ease and maritime flows could stabilize. But all this won't last long. Renewed attacks on tankers passing through the Strait of Hormuz, along with lower crude shipments later in July, pushed Brent sharply higher. At one point, Brent reached $105 per barrel on July 23 before retreating again. Now it is trading near $87, while WTI, or Light crude, is hovering around $82. This once again shows how unstable the oil market has become.

The reason the Strait of Hormuz matters so much is straightforward. It is one of the most important energy chokepoints in the world. As we mentioned earlier, the Strait of Hormuz has remained the main stumbling block in diplomatic efforts between Iran and the USA. It is alternately closed and opened. Iran believes that only Tehran and Muscat can monitor navigation in the Strait of Hormuz, while Donald Trump asserts that the US will not allow Iran to charge fees for passage through the strait.

Roughly one-fifth of global oil shipments move through Hormuz. If that corridor is disrupted, even for a limited period, the effect goes far beyond the Gulf. Shipping insurance costs rise, vessel availability tightens, refiners worry about feedstock access, and traders begin pricing in a geopolitical risk premium.

That is exactly what the market is doing now. A physical shortage can lift prices because fewer barrels are available. But geopolitical tension can also lift prices before a real shortage even appears, simply because buyers, traders, and governments do not want to be caught unprepared. In that sense, oil markets behave partly like commodity markets and partly like fear markets.

Before the conflict intensified, average crude and oil product shipments through the strait in late 2025 were around 21.6 million barrels per day. In the second quarter of this year, that volume reportedly fell to just 4.9 million barrels per day. At the same time, reduced production and export capacity in the Middle East have made the market even more vulnerable. Problems affecting oil infrastructure in the Black Sea region have added to supply risks, further increasing uncertainty over the availability of crude. Yet geopolitical developments are not the only factor determining oil prices. A slowdown in global economic activity and weaker growth in oil demand are among the main factors limiting the rise in prices. Increasing commercial oil inventories in the United States are also putting additional pressure on the market.

The result is a market being pulled in two opposite directions. Geopolitical tensions and the possibility of supply disruptions are pushing prices upward, while weaker demand and rising inventories are limiting the increase. For this reason, high volatility is expected to continue in the near term.

J.P. Morgan's 2026 outlook argues that the oil market has rebalanced less through severe inventory depletion and more through demand destruction than many initially expected. The bank now forecasts Brent averaging about $86 per barrel in the third quarter of 2026, $80 in the fourth quarter, and around $78 by year-end, while also warning that an oversupplied market could emerge if Gulf production recovers further and OPEC cohesion weakens.

The International Energy Agency (IEA) expects global oil inventories to decline more than previously anticipated during this quarter because of the renewed conflict with Iran, despite the fact that high energy prices are reducing demand. Although the market is expected to return to a supply surplus toward the end of this year, significant risks remain. The rapid depletion of strategic oil reserves has also increased the urgency of restoring normal operations in the Strait of Hormuz.

The Organization of the Petroleum Exporting Countries (OPEC), meanwhile, expects global oil demand this year to increase by 580,000 barrels per day compared with last year, reaching 105.74 million barrels per day. Demand in non-OECD countries is expected to rise by 610,000 barrels per day to 59.82 million barrels per day, while demand in OECD countries is projected to increase by 40,000 barrels per day to 45.91 million barrels per day. For 2027, OPEC forecasts that global oil demand will increase by 2.16 million barrels per day compared with this year, reaching 107.9 million barrels per day.

The rise in oil prices has different consequences for importing and exporting countries. For economies that depend heavily on energy imports, higher oil prices primarily mean higher costs. An increase in the price of crude oil raises the cost of gasoline, diesel and aviation fuel, as well as a number of petrochemical products.

Higher transportation costs can then affect the cost of other goods, potentially accelerating inflation. If energy prices remain high for an extended period, the impact can also be felt in monetary policy. Stronger inflationary pressures may cause central banks to delay interest-rate cuts, which in turn could weigh on economic activity.

What do high oil prices mean for Azerbaijan?

For Azerbaijan, higher oil prices also promise positive results in the short term. Energy exports play an important role in generating the country's foreign trade and foreign-exchange revenues. Therefore, an increase in oil prices can contribute to higher export earnings and strengthen fiscal opportunities.

Looking ahead, the direction of oil prices will depend on a few key variables. The first is whether the situation in the Middle East worsens or stabilizes. If tanker attacks continue and Hormuz remains partially disrupted, prices could spike again. If maritime flows normalize and diplomacy regains momentum, the geopolitical premium could fade quickly. The second variable is demand. If the global economy slows further, consumption growth may disappoint and cap prices even in a tense security environment. The third is supply management. OPEC and OPEC+ decisions, along with recovery in Gulf output and production changes elsewhere, will shape whether the market remains tight or slips into surplus.

Image: Dado Ruvic / Reuters