July 2026 Oil Market: A Ceasefire That Opened the Strait of Hormuz, Then Closed It Again

This production surge was made possible by a fragile interim ceasefire between the U.S. and Iran, agreed to in April 2026 and formalized through a June Memorandum of Understanding (MOU). The deal temporarily reopened the critical Strait of Hormuz, allowing Gulf nations to boost exports and reclaim some lost market share .

The Ceasefire Collapse and Renewed Strait of Hormuz Closure

The reopening was short-lived. The interim ceasefire began to unravel around June 17, and by early July hostilities had resumed in force . The timeline of the collapse is as follows:

• July 7: The U.S. launched new strikes on Iran and revoked Iran's oil sales authorization after three tankers were hit in the Strait of Hormuz .
• July 10: President Trump declared the ceasefire "over" .
• July 12: Iran announced it had again closed the Strait of Hormuz to unauthorized vessels .

As of early August, the U.S. reimposed its naval blockade , and the conflict expanded to the Red Sea, further threatening global shipping lanes . The cycle of a ceasefire enabling a production surge, followed by its collapse and a new blockade, defined the entire month.

Russia's Output Shortfall: The Ukrainian Drone Campaign

While Gulf producers briefly increased output, Russia's oil sector continued to struggle. Russia's crude and condensate output rose slightly in July to above 9 million bpd, but this still lagged its OPEC+ quota by roughly 1 million bpd . OPEC data showed Russia's compliance at 98.7% for June, implying production was about 1 million bpd below its target .

The primary driver of this shortfall was Ukraine's intensifying drone campaign. By late July, the Financial Times reported that Ukrainian strikes had disabled over 30% of Russia's operational refining capacity and over 45% of its nominal capacity . This forced Russian crude processing to fall to a 24-year low in July, with refineries processing an estimated 3.6 million bpd, roughly one-third below the seasonal average .

The damage had a cascading effect. With refineries offline, Russia had to increase crude exports, but Ukrainian drone attacks also targeted tankers and export infrastructure, including the Caspian Pipeline Consortium (CPC), limiting shipping options . The IEA had previously cut Russia's 2026 output forecast to 8.9 million bpd (down ~3%) due to these persistent attacks .

The IEA's Dire Warning: A Worsening Supply Deficit

The combination of the renewed Strait of Hormuz closure and Russia's persistent underperformance led to a stark warning from the International Energy Agency. On August 12, the IEA said global oil supply will fall by 4.3 million bpd (roughly 4%) in 2026, with a market deficit of 1.8 million bpd expected in Q3 (July–September) . This was a sharp worsening from the 3.7 million bpd decline the agency had projected just a month earlier .

A critical caveat: The IEA's 4.3 million bpd figure refers to the supply decline versus prior expectations, not a net deficit against demand. Other reports interpret the implied net deficit for 2026 at around 1.27 million bpd, with the Q3 deficit of 1.8 million bpd being the deepest quarterly shortfall since late 2021 . A Reuters poll of analysts conducted in late July forecast an average deficit of 1.5 million bpd for 2026, roughly double the forecast from April .

OPEC+ Response: Gradual Quota Increases Amid Uncertainty

Even as the geopolitical situation deteriorated, OPEC+ continued its plan to gradually unwind production cuts. The seven core members of OPEC+ (Saudi Arabia, Russia, Iraq, Kuwait, Kazakhstan, Algeria, and Oman) agreed to a fourth consecutive monthly output target increase of 188,000 bpd for July 2026 . This was part of a broader strategy to restore the 1.65 million bpd of voluntary cuts that were originally announced in April 2023 .

The net effect of these conflicting forces Brent crude prices settled near pre-war levels of around $72/bbl in early July , but the renewed conflict sent prices higher again by late July . The market was left in a state of profound uncertainty, with supply a function of a rapidly changing and unpredictable geopolitical landscape.