Oil Market Surplus Looms Amid Middle East Ceasefire

The US dollar and oil have seen their traditional correlation break down as Brent crude prices plummeted to their worst daily fall in three months. The decline is largely due to a ceasefire in the Middle East, which has reduced investor fears of supply disruptions. Macquarie Bank estimates that the conflict will de-escalate within weeks rather than months, with oil market analysts predicting a surplus of 2 million barrels per day by the fourth quarter.

This surplus is set to double in the first quarter of 2027, further pressuring Brent prices. However, Barclays notes that oil flows through the Strait of Hormuz have fallen from 5.9 million bpd to 2.9 million bpd, while Société Générale believes around 4% of global supplies are at risk.

Despite these risks, rising Chinese imports and global demand will keep Brent prices high even as the conflict in the Middle East continues to de-escalate. The Federal Reserve's potential surprise move could also boost the US dollar, adding uncertainty to oil markets.