SKN | Morgan Stanley Raises Brent Forecasts as Middle East Supply Recovery Slows

Key Takeaways:

• Morgan Stanley raised its Brent forecasts substantially, expecting prices to reach $100 per barrel in the fourth quarter of 2026 as Middle East supply recovers more slowly than previously assumed.
• The bank now sees the oil market remaining in deficit through the fourth quarter of 2026 and first quarter of 2027, with its revised forecasts ranging from $90 to $100 per barrel through the second quarter of 2027.
• The oil outlook is increasingly sensitive to geopolitical developments, with the Strait of Hormuz, potential additional sanctions on Iran and declining inventories creating important risks for global inflation and asset allocation.

Morgan Stanley Sees a Tighter Oil Market Ahead

Morgan Stanley has raised its Brent crude forecasts after concluding that Middle East supply is recovering more slowly than previously expected.

The bank now expects the oil market to remain in deficit throughout the fourth quarter of 2026 and the first quarter of 2027. Its revised Brent forecast is $90 per barrel for the third quarter of 2026, rising to $100 in the fourth quarter, followed by $95 in the first quarter of 2027 and $90 in the second quarter.

That represents a substantial increase from its previous assumption of $75 per barrel for each of those quarters.

Morgan Stanley said crude markets are tightening, pointing to a sharp recent decline in oil held on water as well as falling onshore inventories, including in China. The bank also revised its assumption for the pace of Middle East supply recovery, now expecting the process to extend well into 2027.

Geopolitical Risk Keeps Supply Expectations in Focus

The revised outlook comes as geopolitical developments continue to influence the availability and movement of crude.

Oil prices fell by more than $1 per barrel on Monday as investors took profits ahead of an expected Washington announcement concerning additional sanctions on Iran. Such measures could further disrupt Middle East supply, adding another layer of uncertainty to an already constrained market.

Both major crude contracts had recorded their second consecutive weekly gains in the preceding week, rising by more than 5%. Peace negotiations between the United States and Iran had reached an impasse, while disruptions around the Strait of Hormuz continued to constrain shipments.

The strategic importance of the waterway remains substantial because approximately one-fifth of global oil supply historically transited the strait. Any prolonged disruption could therefore affect not only crude prices but also inflation expectations, transportation costs and monetary-policy assumptions.

Refined Products Signal Additional Market Tightness

Morgan Stanley also highlighted an unusual divergence between crude oil and refined products.

The ICE gasoil contract was trading near $175 per barrel while Brent was around $92, producing an all-time-high crack spread of approximately $75, according to the source.

A crack spread measures the difference between the price of refined petroleum products and the price of crude used to produce them. The unusually wide spread indicates that refined-product markets are experiencing particularly strong pricing pressure relative to crude.

For investors, this distinction matters because a disruption in crude supply can propagate through the wider energy complex. Refining margins, transportation costs and consumer energy prices can all respond differently depending on where the supply constraint occurs.

Higher Oil Prices Could Affect Broader Asset Allocation

A sustained period of Brent prices near or above $90 could have implications well beyond energy equities.

Higher energy costs can feed into inflation, potentially complicating the outlook for central banks that are attempting to balance economic growth against persistent price pressures. Higher inflation expectations can, in turn, influence bond yields, currencies and equity valuations.

For globally diversified portfolios, the interaction between oil prices and interest rates therefore deserves particular attention. Energy producers may benefit from stronger commodity prices, while energy-intensive industries and consumers can face higher costs.

The geopolitical component also introduces an additional layer of portfolio risk. A faster normalization of Middle East supply could cause prices to retreat, while a prolonged disruption around the Strait of Hormuz could produce another upward move.

Closing Insights

Morgan Stanley’s revised Brent outlook represents a meaningful change in its assessment of the global oil market. The move from a uniform $75-per-barrel assumption to forecasts reaching $100 in the fourth quarter of 2026 reflects expectations that Middle East supply normalization will take considerably longer than previously anticipated.

For global wealth investors, the central issue is not simply the direction of crude prices but their potential transmission into inflation, interest rates, currencies and corporate margins. The unusually wide refined-product spread and declining inventories add further evidence that supply conditions deserve close monitoring.

The key variable remains the pace of Middle East normalization. A faster recovery could ease the deficit and pressure prices lower, while prolonged geopolitical disruption could keep energy markets tight well into 2027.

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