Q3 Is Set for Extreme Volatility, Oil Analysts Warn

In an oil report sent to Rigzone by the Fitch Group on Friday, analysts at BMI, a unit of Fitch Solutions, warned that the third quarter is set for “extreme volatility”.

“July 2026, which was characterized by wild fluctuations in the market for Dated Brent, with prices ranging from $68.1-$105.6 per barrel at the daily close, has set the tone for August,” the BMI analysts said in the report.

“After an aggressive sell-off in June, crude started rallying sharply on July 8, as the U.S.-Iran memorandum of understanding (MoU) began to fracture, with Dated Brent rising to close above $105 per barrel on July 23,” they pointed out.

“Subsequently, amid a brief hiatus in U.S.-Iranian attacks, prices relapsed, with Dated Brent closing at $85.7 per barrel on July 28, having lost nearly 20 percent of its value in less than a week, before rebounding above $90 per barrel at the time of writing on July 30,” they continued.

The analysts highlighted in the report that their current forecast assumes an average of $85 per barrel in August and $80 per barrel in September but warned that the near-term outlook is “highly uncertain”, adding that they expect significant volatility in prices over the current quarter.

Upward Revision

According to the report, BMI analysts expect Dated Brent to average $86 per barrel overall in 2026 and $71 per barrel overall in 2027. They see Brent Futures coming in at $83 per barrel this year and $71 per barrel next year, the report revealed.

“This month we have made an upward revision to our oil price forecast, raising Dated Brent to an annual average of 86.0 per barrel in 2026 (from $84 per barrel previously) and Brent futures to $83.0 per barrel (up from $81.0 per barrel),” the analysts said in the report.

The analysts noted that the revision had been triggered by the shift from its “Constructive Negotiations” scenario to its “Messy Negotiations” scenario for the U.S.-Iran war.

“Under this scenario, a preliminary agreement to reopen the Strait of Hormuz is reached in Q3 2026, with oil exports broadly normalizing over the fourth quarter,” they highlighted.

“In the interim, the U.S. and Iran engage in intermittent military exchanges but stop short of a return to high-intensity warfare,” they added.

“This sets the stage for volatile price movements over the coming weeks and months, with a shaky diplomatic track and volatile conditions on the ground driving sudden and extreme shifts in market fundamentals and risk premia,” they continued.

The analysts revealed in the report that, from the fourth quarter of this year, they “grow bearish” in their outlook, “factoring in a sharp sell-off once a preliminary agreement is reached and a material loosening in the physical market for crude”.

Breaching $100

In the report, the BMI analysts pointed out that breaching the $100 per barrel mark took a “potent combination of factors”.

They outlined that these comprised, “the restart of military exchanges between the U.S. and Iran, the renewed shut-in of the Strait of Hormuz, the reimposition of the U.S. naval blockade, the announcement of the Houthi embargo on Saudi ports, and multiple attacks on oil tankers and infrastructure”.

“Moreover, the resulting collapse in regional oil exports coincided with the temporary loss of around 1.5 million barrels per day of Kazakh crude from the CPC export terminal in the Black Sea,” they said.

“Excluding the CPC terminal, which has since resumed loadings, all these factors remain firmly in play,” they warned.

The BMI analysts projected that maritime disruptions in the Middle East will remain elevated across the third quarter.

“With the Houthi embargo, and subsequent attacks on Saudi-linked oil tankers, maritime disruptions have widened from the Persian Gulf to the Red Sea,” the analysts said.

“The Red Sea has provided Saudi Arabia with a crucial bypass of the Strait of Hormuz, with around three to four million barrels per day flowing southbound through the Bab el-Mandeb Strait and onto Asia,” they added.

“The bulk of these barrels, now under threat from the Houthis, can be rerouted north through the Suez corridor. As such, the impact on export volumes should be limited, although rerouting will significantly delay deliveries and inflate costs,” they continued.

“The much greater threat lies in attacks on Saudi oil infrastructure, specifically the key Red Sea terminal of Yanbu, which has already been targeted by the Houthis,” they went on to state.

How Things Could Play Out

Wood Mackenzie’s latest The Edge report, which was curated by the company’s chairman and chief analyst Simon Flowers and included input from analysts such as Alan Gelder - SVP Refining, Chemicals & Oil Markets - outlined some scenarios for how things could play out in the conflict.

One of these scenarios comprised a “no deal” pathway, which would lead to an “inevitable” global recession, the report outlined.

“Persistent - or, at least, sporadic - conflict in the Gulf and Red Sea constrain exports of crude and LNG (and other commodities) for months,” the report projected under this scenario.

“Oil and LNG value chains come under increasingly severe stress. Up to 12 million barrels per day of liquids (12 percent of the global production market) and 86 Mt of LNG production (20 percent) are shut in, amplifying risks of extended degradation through the value chains, including reservoir deterioration,” it added.

“Global oil stocks are low, despite a few weeks of replenishment after the MoU. Crude and product inventory draw accelerates again in key markets. Visible inventories at Cushing are already near operational minimums, reducing the volumes of U.S. crude available to export markets,” it continued.

Upward pressure mounts on energy prices, the report stated under this scenario.

“Different seasonal factors are at play compared with earlier spikes, with late summer in the northern hemisphere traditionally the peak of global oil demand,” it said.

“China switching to tap its strategic oil reserves rather than pay up for crude imports at elevated prices only stalls the reckoning,” it added.

“Brent futures return to the previous $120 per barrel peaks of March and April before climbing higher still. Demand destruction is the only means to ultimately deliver market balance,” it warned.

“Tight LNG supply, absent Gulf exports, threatens to leave European gas storage dangerously low ahead of winter. LNG prices rise to demand-destroying levels as importers, particularly in Asia, look to switch fuels to coal,” it stated.

“The economic outlook deteriorates as high energy prices push the global economy into shallow recession in H2 2026. Prolonged high prices persisting towards the end of the year plunge the world into a deeper recession into 2027, scarring the global economy,” it went on to predict.

Credible Deal

Under another scenario, a “credible deal” is brokered and the Brent oil price “slumps”, the Wood Mackenzie report outlined.

This development would lead to a market reaction similar to the June signing of the MoU, according to the report, which noted that reopening export routes leads to Brent “immediately falling off a cliff, [and] investors bailing from positions that bet on higher oil and refined product prices”.

“A period of volatility ensues as the market assesses the sustainability of the deal, monitors the risk of flare ups and the likely variance between the speed of demand and supply recovery,” the report noted under this scenario.

Fundamentals gradually reassert themselves in this scenario, according to the report, which outlined that the oil market would head towards a glut.

“There is no shortage of liquids once production and vessel flows normalize, supply recovery likely outpacing demand recovery even as strategic reserves are refilled,” it stated.

“With the UAE out of OPEC and freed from production constraints, and the permanent removal of U.S. sanctions on Iran’s oil exports opening up a wider customer base to support Iranian production growth, the market could be awash with oil,” it added.

“Brent sinks well below $60 per barrel into 2027,” the report projected under this scenario.

“A diminished OPEC+ needs to act decisively to avoid much lower prices that are a certainty if the group elects to compete for market share,” it added.

To contact the author, email andreas.exarheas@rigzone.com