Middle Eastern supply recovery is slower than expected; Morgan Stanley raises its Brent crude forecast to $100/bbl in 4Q

Overview

The report examines why the global crude oil market is tightening again: exports from the Middle East, Russia, and the United States have declined; inventories both at sea and on land are falling; strategic reserve releases are nearing an end; and Chinese purchases are no longer deteriorating. Although damage to the refining system is temporarily suppressing crude demand, Morgan Stanley still expects the recovery in Middle Eastern supply to be slower than previously anticipated, leaving the market in deficit in 4Q26 and 1Q27 and prompting an upgrade to its Brent crude forecast.

Core views

Oil prices have experienced extreme volatility: front-month Brent remained above $110/bbl in mid-May, briefly fell to $71/bbl in early June, subsequently rebounded to approximately $100/bbl, and then declined to $79/bbl two weeks later; by the time of writing, it had risen again to approximately $92/bbl. Morgan Stanley attributes the gains over the past two weeks to lower supply, continued inventory draws, and the market's growing recognition that the disruption to Middle Eastern supply may persist for longer. However, tightness is not evident across all regions: front-month spreads for Brent and WTI, DFL, CFDs, and North Sea physical differentials have yet to indicate substantial tightening, and near-term Atlantic Basin supply remains relatively ample; tightness is concentrated mainly in the Dubai market. Since August 4, Dubai's M1-M2 spread has increased by $1.52/bbl, from $1.72/bbl to $3.24/bbl, while Brent and WTI have changed by only $0.37/bbl and negative $0.05/bbl, respectively, over the same period; Dubai's physical premium has also returned to $11.50/bbl. This is consistent with the regional pattern in which inventory declines have occurred mainly east of the Suez Canal, particularly in China. Inventory data provide a physical basis for the increase in oil prices. Vortexa data show that crude oil at sea declined from 1.38 billion barrels on July 13 to 1.21 billion barrels currently, a cumulative reduction of 168 million barrels, equivalent to 4.7 million bbl/d. During the four weeks ended August 16, crude oil at sea declined at a rate of 5.3 million bbl/d, the fastest four-week draw on record in this time series. Over the same four weeks, observable onshore crude inventories declined by 38 million barrels, or 49 million barrels including refined products. In other words, even as crude at sea declined at approximately 5 million bbl/d, onshore crude inventories still fell at approximately 1.4 million bbl/d, indicating that arriving crude was absorbed by refineries rather than converted into onshore inventories. Recent seaborne arrivals remain approximately 43 million bbl/d, but new exports have fallen to approximately 37.5 million bbl/d, only the 4th percentile over the past three years. Because arrivals lag exports, import arrivals are expected to decline over the coming weeks. If onshore inventories were already declining with arrivals of 43 million bbl/d, they are even more likely to continue drawing once arrivals fall to approximately 37 million bbl/d. The deterioration in supply is centered on the Middle East. After the United States and Iran reached a memorandum of understanding in mid-June, crude exports through the Strait of Hormuz briefly recovered to approximately 15 million bbl/d, close to pre-conflict levels, but the run rate has fallen to approximately 6 million bbl/d over the past two weeks. This remains above the 2 million-3 million bbl/d recorded in March-April, but at that time Saudi Arabia could divert large volumes of crude to the western port of Yanbu, with exports through the Red Sea typically reaching 4 million-4.5 million bbl/d. Following Houthi threats against tankers in the Bab el-Mandeb Strait, observable Red Sea exports are currently only approximately 1.5 million bbl/d. Data from both Vortexa and Petro-Logistics show that total Middle Eastern exports are again approaching March-April levels. The latest tanker-tracking data may be revised because of identification delays: since the Strait of Hormuz crisis, initial estimates of combined exports from Saudi Arabia, the UAE, Kuwait, Iran, and Iraq have subsequently been revised upward by a median of approximately 0.6 million bbl/d over the following four weeks, with 75% of estimates revised upward and 25% revised downward. However, the report believes that even adding 0.6 million bbl/d back to the latest figures would not change the conclusion that supply has tightened materially. Russian crude exports have also retreated from their previous highs to year-earlier levels, while US exports have returned to normal levels as strategic reserve releases end. Strategic inventories that previously alleviated the physical shortage are losing their effect. The report estimates that global strategic petroleum reserves added approximately 2.5 million bbl/d of supply in March-April 2026, but this contribution has steadily declined since then. The US Strategic Petroleum Reserve fell to 298.7 million barrels on August 7, dropping below 300 million barrels for the first time since February 1983; weekly releases have slowed from approximately 9 million barrels in May to 3 million-6 million barrels currently. A June report from the US Government Accountability Office also noted that nearly one-quarter of reserve crude cannot physically be released, meaning actual available volumes are lower than headline inventories. Japan has completed its releases and on August 7 proposed replenishing inventories as early as fiscal 2026-27 to meet the International Energy Agency's 90-day coverage requirement, shifting its role from seller to buyer. Under current plans, strategic reserve releases in August and September will be approximately 0.5 million bbl/d and 0.2 million bbl/d, respectively, with no material releases expected after September. Strategic inventories will therefore be increasingly unable to offset the supply shortfall. China previously freed up supply for the rest of the world by reducing imports, but this buffer is also approaching its limit. China's seaborne crude imports are normally 10 million-11 million bbl/d but briefly fell to 5 million bbl/d during the crisis. After the memorandum of understanding was signed in June, approximately 100 million barrels of crude previously stranded beyond the Strait of Hormuz were shipped out, with some flowing to China and lifting arriving imports to approximately 8 million bbl/d. The report believes this was driven more by the release of backlogged supply than by a proactive strengthening in Chinese demand. Based on tanker departure destinations, the latest shipments bound for China have fallen back to approximately 6 million bbl/d, indicating that purchasing remains weak. Before the crisis, Chinese buyers typically contracted approximately 6 million bbl/d ahead of the spot market; this has fallen to approximately 4 million bbl/d since April. However, delivery data for August, September, and October indicate that the downtrend has stopped and imports may be stabilizing at low levels. If Chinese purchasing has indeed bottomed, the risk China poses to the global balance will shift to the upside: deficits outside China can no longer be resolved through further reductions in Chinese imports, and any recovery in Chinese imports would widen shortfalls elsewhere. The main constraint preventing further tightening in the crude market comes from the refining sector. Russian refineries have suffered multiple rounds of drone attacks, taking approximately 3.5 million bbl/d of refining capacity offline. Several million bbl/d of refining capacity beyond the Strait of Hormuz has been shut because refined products cannot be exported, and some refineries have also been damaged, including Saudi Arabia's 0.4 million bbl/d Jazan refinery on the Red Sea coast. Chinese refinery runs are down 2 million bbl/d year over year due to a sharp reduction in discounted crude from the Middle East, Russia, Iran, and Venezuela, the disappearance of discounts, and the relatively poor fit of long-haul Atlantic crude from regions such as Brazil or West Africa with Chinese refineries. At the same time, high freight rates combined with regulated domestic refined-product prices mean that alternative feedstocks remain unprofitable. These factors have reduced global refinery runs by approximately 6 million bbl/d year over year, with refinery outages 5 million-6 million bbl/d above normal levels. Refineries elsewhere are already operating near full capacity, leaving insufficient refining capacity for now to drive crude demand higher. Constrained refining capacity means tightness is reflected more in refined products than in crude oil. Front-month ICE diesel is approximately $175/bbl, while front-month Brent is approximately $92/bbl, with the crack spread cited in the report reaching a record high of $75/bbl. Over the past 35 years, Brent has averaged 83% of the ICE diesel price, with a one-standard-deviation range of 76%-89%. The current ratio is only 53%, the lowest in history apart from one anomalous trading day in 1991, and 4.5 standard deviations below the mean. The report therefore presents a relative-price argument: if Brent merely recovered to 60% of the diesel price, it would exceed $105/bbl, while refinery margins would remain above historical levels. Such convergence requires some idled refining capacity to restart. Although the timing is uncertain, the report believes that with both outage volumes and refining margins at historical extremes, some capacity is more likely to return, which would increase crude demand. The final forecast depends on how long the Middle Eastern situation persists. The report cites the UCDP Conflict Termination Dataset: since 1946, 72 interstate conflicts have ended, arising from 48 distinct underlying conflicts, with a median duration of only eight weeks. However, once a conflict lasts more than six months, the probability that it continues beyond one year rises to 55%, with an uncertainty range of 40%-70%, meaning it is “slightly more likely than not to exceed one year.” Combined with limited progress in peace negotiations, the report believes there is a material probability that Middle Eastern supply will remain under pressure. Morgan Stanley previously expected Middle Eastern supply to be close to fully restored by the end of 2026, which would have shifted the market back into surplus. It now assumes a more gradual recovery path, with supply continuing to increase but not fully recovering until the end of 3Q27. Under the new assumptions, both total liquids and crude-only balances will continue drawing inventories in 4Q26 and 1Q27. Coupled with record-high refining margins and refineries' ability to pay higher crude prices, the report raises its Brent forecast and expects the price to reach $100/bbl in 4Q26.

Analysis framework

The report first compares physical prices, time spreads, and regional differentials for Brent, WTI, and Dubai to determine where tightness is concentrated. It then uses tanker tracking, crude oil at sea, onshore inventories, and arrival and departure data to verify the physical balance. Next, it analyzes changes in Middle Eastern, Russian, and US supply, as well as three buffer factors: strategic reserves, Chinese imports, and refinery runs. Finally, based on diesel-crude relative pricing, refining margins, and the historical duration of conflicts, it revises the recovery path for Middle Eastern supply and derives its inventory and Brent price forecasts.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Global crude oil supply-demand balance and inventory changes

  The report incorporates exports, arrivals, refinery processing, strategic reserve releases, and Chinese imports into a single balance framework, using inventory builds or draws to determine whether the market is in surplus or deficit and to formulate its price forecast.

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Value Chain Transmission

  Transmission among refining capacity, crude oil demand, and refined-product prices

  The report analyzes how refinery outages first reduce crude processing demand and then drive up diesel prices and crack spreads, as well as how refinery restarts would conversely increase crude demand.

• Event Dynamics and Behavioral FinanceEvent-driven analysis

  Analysis of geopolitical conflicts, transportation routes, and strategic reserve events

  The report assesses the direct effects on exports, refining capacity, and inventories of developments involving the Strait of Hormuz, the Bab el-Mandeb Strait, attacks on Russian refineries, and changes in strategic reserve policies.

• Industry/Sector Analysis Framework

  Cross-validation of tanker tracking and observable inventories

  The report simultaneously tracks tanker departures, arrivals, crude oil at sea, and onshore inventories, while accounting for tanker-identification delays and subsequent revisions, to verify whether recent physical supply has genuinely tightened.

• Event Dynamics and Behavioral Finance

  Historical benchmark probabilities for conflict duration

  The report uses historical samples of interstate conflicts from UCDP to estimate how long the current Middle Eastern situation may persist and translates this probability assessment into an assumption of a slower supply recovery.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Brent Crude

  A slower recovery in Middle Eastern supply, continued inventory declines, and the end of strategic reserve releases support the price-upside thesis.

  Strengths

  Global inventories are declining, refining margins are at record highs, and refineries can afford to pay higher crude prices.

  Weaknesses

  Front-month Brent spreads, DFL, CFDs, and North Sea differentials have yet to indicate the same degree of physical tightening as the Dubai market.

  Comparison

  Relative to the ICE diesel price, Brent's current ratio is only 53%, below the 35-year average of 83%; the report argues that if it recovered to 60%, the price would exceed $105/bbl.

  Risks

  If Middle Eastern supply recovers faster than assumed under the new scenario, or refinery outages continue to constrain crude demand, the upside in prices will be limited.

• Dubai Crude Market

  Inventory declines east of the Suez Canal and lower Middle Eastern exports have caused physical tightness to be concentrated first in the Dubai market.

  Strengths

  Since August 4, the M1-M2 spread has risen from $1.72/bbl to $3.24/bbl, while the physical premium has recovered to $11.50/bbl.

  Weaknesses

  The latest Middle Eastern export estimates rely on tanker tracking and are subject to identification delays of several days and subsequent upward revisions.

  Comparison

  Over the same period, the M1-M2 spreads for Brent and WTI changed by only $0.37/bbl and negative $0.05/bbl, respectively, materially weaker than Dubai.

  Risks

  If the latest tanker data are revised substantially upward, the apparent degree of recent tightening may diminish, although the report believes this would not change the overall conclusion.

• ICE Diesel

  Large-scale refinery outages have caused supply tightness to be reflected mainly in refined products, pushing diesel prices and crack spreads to historical extremes.

  Strengths

  The front-month price is approximately $175/bbl, and the crack spread relative to Brent cited in the report has reached a record high of $75/bbl.

  Weaknesses

  The current high price partly reflects abnormal refining-capacity constraints rather than purely an expansion in end demand.

  Comparison

  Brent is equivalent to only 53% of the diesel price, 4.5 standard deviations below the 35-year average of 83%.

  Risks

  The restart of idled refining capacity could alleviate tight diesel supply and cause the extreme relative spread to converge.

Key data

• Current Brent crude priceApproximately $92/bblPrice at the time of writing; it has risen again over the past two weeks.
• Forecast peak for Brent crude$100/bbl in 4Q26Raised due to the extended Middle Eastern supply recovery path and continued inventory declines.
• Crude oil inventories at seaDeclined from 1.38 billion barrels to 1.21 billion barrelsDown 168 million barrels since July 13, 2026, equivalent to 4.7 million bbl/d.
• Fastest four-week decline in crude oil at sea5.3 million bbl/dAs of August 16, the fastest four-week decline on record in this time series.
• Observable onshore crude inventoriesDown 38 million barrels over four weeksIncluding refined products, the combined decline was 49 million barrels.
• Recent seaborne crude exportsApproximately 37.5 million bbl/dBelow arrivals of approximately 43 million bbl/d and at the 4th percentile over the past three years.
• Recent exports through the Strait of HormuzApproximately 6 million bbl/dThey briefly recovered to approximately 15 million bbl/d after mid-June.
• Red Sea crude exportsApproximately 1.5 million bbl/dTypically 4 million-4.5 million bbl/d in March-April.
• Strategic reserve releasesApproximately 0.5 million bbl/d in August and approximately 0.2 million bbl/d in SeptemberThe report expects no material releases after September; they contributed approximately 2.5 million bbl/d in March-April.
• US Strategic Petroleum Reserve298.7 million barrelsAs of August 7, below 300 million barrels for the first time since February 1983.
• Chinese seaborne crude importsApproximately 8 million bbl/dNormally 10 million-11 million bbl/d and briefly as low as 5 million bbl/d during the crisis.
• Chinese spot crude purchasesApproximately 4 million bbl/dNormally approximately 6 million bbl/d before the crisis; August-October data indicate stabilization at low levels.
• Global refinery runsDown approximately 6 million bbl/d year over yearRefinery outages are approximately 5 million-6 million bbl/d above normal levels.
• Offline Russian refining capacityApproximately 3.5 million bbl/dPrimarily due to multiple rounds of drone attacks.
• Diesel and Brent pricesICE diesel approximately $175/bbl; Brent approximately $92/bblThe crack spread cited in the report is a record-high $75/bbl.
• Brent as a percentage of the diesel price53%The 35-year average is 83%, with the current level 4.5 standard deviations below the mean.
• Probability of a prolonged conflict55%The probability that a conflict exceeds one year once it has lasted more than six months; the uncertainty range is 40%-70%.
• Timing of full recovery in Middle Eastern supplyEnd of 3Q27The previous assumption was a near-full recovery by the end of 2026.

Impact & implications

The report argues that lower supply, declining inventories, and the end of strategic reserve releases mean that the market shortfall will be harder to absorb with existing buffers. Constrained refining capacity is currently delaying further tightening in crude oil but has pushed diesel prices and refining margins to historical extremes. If some refineries restart, the resulting increase in crude demand could drive partial convergence between crude and diesel prices. The delay in the full recovery of Middle Eastern supply until the end of 3Q27 makes continued inventory draws in 4Q26 and 1Q27 the central basis for the higher Brent forecast.

Risks

• The duration of geopolitical tensions in the Middle East is difficult to predict precisely; if supply recovers rapidly before the end of 2026, the crude market could return to surplus.
• The latest tanker-tracking data are subject to identification delays of several days, and initial estimates of recent Middle Eastern exports may be revised upward; the historical median upward revision is approximately 0.6 million bbl/d.
• Whether and when some idled refining capacity can restart remains uncertain; if outages persist, crude demand may remain constrained.
• Although Chinese purchasing may have bottomed, it remains at low levels, with new shipments bound for China at approximately 6 million bbl/d.

What to watch

• Track total Middle Eastern exports, shipment volumes through the Strait of Hormuz and the Red Sea, and subsequent revisions to the latest tanker data.
• Monitor whether Middle Eastern supply recovers gradually in line with the new assumptions through the end of 3Q27.
• Track crude oil at sea, onshore inventories, and lagged changes between exports and arrivals.
• Monitor whether global strategic reserve releases largely end as planned after September 2026 and whether Japan shifts to inventory replenishment.
• Track whether Chinese spot purchases and seaborne imports recover from low levels in August-October.
• Monitor the recovery in refinery runs in Russia, the Middle East, and China, and whether diesel crack spreads prompt more refining capacity to restart.
• Compare time spreads and physical premiums for Dubai, Brent, and WTI to determine whether physical tightness is spreading from Asia to the Atlantic Basin.