Brent Oil's $60 Floor at Risk as Geopolitical Volatility Outpaces Durable Supply Surplus

The core macroeconomic setup for 2026 points to a structurally supported price baseline, anchored by a widening supply-demand surplus. This fundamental imbalance, driven by robust output growth outpacing demand, is the primary force shaping the year's price trajectory. According to the International Energy Agency, world oil supply is forecast to rise by 2.4 mb/d in 2026, while demand is projected to grow by 850 kb/d. This gap creates a persistent surplus, a dynamic already visible in recent data. Preliminary figures show global stocks surged by 49 mb in January, continuing a trend of inventory accumulation that took total 2025 builds to 477 mb. J.P. Morgan Global Research sees this as a durable feature, noting that oil surplus was visible in January data and is likely to persist.

The mechanism for absorbing this surplus is already underway. A key channel has been the redirection of Russian crude flows. As sanctions pressure traditional buyers, barrels are being rerouted, with shipments to China rising by 0.5 million barrels per day last year. This shift in trade patterns helps manage the glut but does not eliminate the underlying oversupply. The bottom line is that this structural surplus provides a clear, cycle-driven floor for prices. J.P. Morgan's analysis concludes that Brent crude averaging around $60/bbl in 2026 is the likely outcome under these soft fundamentals. This figure represents the baseline equilibrium, where supply growth consistently outstrips demand expansion.

Scenario 1: The Bullish Geopolitical Shock (Brent: $100-$120)

The market has already staged a dramatic reaction. Global benchmark Brent Oil surged to $119.25 a barrel on March 9, its highest level since mid-2022, before stabilizing around $90. This represents a 50%+ year-to-date rise, a complete reversal of the pre-conflict bearish outlook. The spike was driven by the effective closure of the Strait, which experts forecast will further reduce Middle Eastern oil production. The price action shows how quickly geopolitical risk can dominate fundamentals.

Yet this scenario is defined by extreme uncertainty and volatility. The timeline for conflict resolution is highly unpredictable, with the VIX near 25 and fear indicators reflecting deep instability. As of early March, the CBOE Volatility Index was above 29 and remains elevated, while CNN's Fear & Greed Index hovered in "Extreme Fear" territory. This volatility is a direct result of the war's unpredictable trajectory and the market's struggle to gauge the duration of the supply disruption. Policy actions, like the IEA's unprecedented plan to release 400 barrels from emergency stocks, have provided only temporary relief, underscoring the fragility of any price stabilization.

The bottom line for this scenario is that a closed Hormuz can push Brent into the $100-$120 range. However, the market's reaction also reveals a key vulnerability: the price spike is a function of risk, not a permanent shift in supply-demand balance. As long as the fundamental surplus persists, any resolution to the conflict would likely trigger a sharp reversal. This scenario, therefore, is a high-risk, high-reward event that could temporarily lift prices but does not alter the underlying 2026 cycle.

Scenario 2: The Base Case Stalemate (Brent: $60-$80)

The most likely path for 2026 is a prolonged stalemate. This scenario assumes a temporary ceasefire or tacit stand-down, followed by a period of lingering lower-intensity strikes. The critical feature is that the Strait of Hormuz remains closed for months, delaying the full reopening of this vital waterway. This creates a persistent, moderate risk premium that supports prices above the fundamental surplus floor.

Under this setup, prices would trade in a range anchored by the underlying structural surplus. J.P. Morgan's analysis points to a baseline equilibrium where Brent averages around $60/bbl. However, the sustained closure of the Strait would provide a persistent floor, likely keeping prices above $70. The range would be supported by the $60 baseline but lifted by the ongoing geopolitical risk, resulting in a trading band of roughly $60 to $80.

The Federal Reserve's stance adds another layer of uncertainty. The central bank is on a wait-and-see approach, with officials projecting at least one rate cut in 2026. Yet, as Fed Chair Jerome Powell has noted, the full economic impact of the war is still uncertain. This has led the Fed to give virtually no forward guidance, leaving rates unchanged for a second straight meeting. The market's expectation for rate cuts has already been pared down, edging closer to the possibility of no cuts for the year. This policy ambiguity means the dollar and real interest rates-key drivers for commodity prices-will remain in flux, adding volatility to the oil market's range-bound movement.

In essence, this scenario represents a market caught between two forces. The durable supply surplus provides a powerful downward pressure, while the closed Strait injects a sustained upward risk premium. The result is a constrained, choppy trading environment where prices oscillate within a band defined by these conflicting macro cycles.

Scenario 3: The Bearish Resolution (Brent: $40-$60)

The bearish resolution scenario assumes a swift end to the conflict, with the war concluding earlier than the current base case and the Strait of Hormuz reopening within a short period. This would remove the significant geopolitical risk premium that has been a major driver of prices this year. As ING's scenario framework notes, this is the "optimistic alternative" where the closure is temporary and the waterway's vital flows resume quickly.

The immediate price impact would be a sharp reversal. With the supply shock lifted, Brent crude would fall back toward its fundamental equilibrium, which J.P. Morgan Global Research sees as averaging $60/bbl in 2026. The risk premium that pushed prices above $100 would evaporate, likely driving the market down into the $40-$60 range. This outcome reflects a return to the structural surplus, where supply growth consistently outpaces demand expansion.

A secondary effect of this resolution would be a potential boost to U.S. crude production. Higher oil prices, even if they fall back toward the $60 baseline, can stimulate investment and output from American shale producers. However, this effect is secondary to the dominant global trend. The broader supply growth, driven by robust output from other regions and the redirection of Russian barrels, would continue to press on prices. In other words, while a price rebound could marginally accelerate U.S. production, it would not be enough to offset the underlying global oversupply that defines the 2026 cycle.

The bottom line is that a quick peace offers a clear path to lower prices. It removes the primary near-term catalyst for volatility and allows the market's long-term, bearish fundamentals to reassert themselves. For investors, this scenario represents a reset to the cycle's baseline, where the structural surplus sets the price floor.

Catalysts and Watchpoints

The unfolding scenarios for 2026 will be determined by a few key events and metrics. The primary catalyst is the timeline for the Strait of Hormuz's reopening. ING's new base case assumes intensive combat will end within weeks, but the waterway's full opening will be delayed for months. Any delay beyond this timeline would sustain the geopolitical risk premium, keeping prices above the fundamental $60/bbl floor. Conversely, a swift resolution, as envisioned in the optimistic alternative, would trigger a rapid price reversion toward that baseline.

Monitoring global inventory levels and refinery throughputs is critical for gauging the strength of the structural surplus. Preliminary data shows global stocks surged by 49 mb in January, continuing a trend of accumulation that took total 2025 builds to 477 mb. The IEA reports that global refinery crude throughputs dropped from an all-time high in December, a sign of weakening demand. A sustained build in inventories or a further decline in refinery runs would confirm the surplus is tightening, putting downward pressure on prices and challenging the $60/bbl average.

Finally, watch for any acceleration in global growth or a significant supply disruption that could tighten the surplus. While demand is forecast to grow by 850 kb/d in 2026, a stronger-than-expected rebound in non-OECD economies could absorb more of the projected 2.4 mb/d rise in world oil supply. Similarly, a major supply shock-whether from a conflict escalation or a production outage-could temporarily reverse the surplus and push prices higher. For now, the market is caught between these forces, with the Strait's reopening date being the most immediate and decisive watchpoint.