Middle East oil supply predicted to recover by end of ‘26, faster than expected – Rystad Energy oil market note

Brent crude is trading around $73 a barrel today, near its lowest level in three months, as the oil market prices in a faster-than-expected recovery in Middle East supply.

Rystad Energy now estimates that shut-in production across the Gulf has fallen to 9.6 million barrels per day (bpd) in mid-June, down from 11.7 million bpd just three weeks ago.

The 17 June preliminary US-Iran agreement and Washington’s subsequent decision to lift Iranian oil sanctions for 60 days have driven the acceleration.

Rystad has revised its forecast for a full regional supply recovery forward by a full quarter, to the end of 2026.

Supply is recovering faster than forecast

Three developments have shifted the supply outlook in quick succession: the US and Iran signed a preliminary agreement on 17 June, Washington then granted Iran a 60-day license to sell oil on international markets, and producers across the Gulf began reporting restart timelines ahead of earlier estimates.

Together, Rystad now expects total outages to fall below 2 million bpd by the end of the third quarter, with the region back to pre-conflict output by December.

The recovery, although occurring at breakneck speed, is uneven across countries and largely driven by Saudi Arabia and the UAE together accounting for around 65% of what is still being produced in the region.

Both producing nations kept exports running throughout the conflict via pipeline bypass routes, so their production systems were not entirely paralyzed.

Iran is currently seeing the fastest rebound: its shut-in period was shorter, upstream damage was limited, and the US naval blockade has been lifted.

Kuwait and Iraq are progressing more slowly. Their fields rely on heavier, mature reservoirs that take longer to bring back online, and both depend almost entirely on the Strait of Hormuz for exports.

Iran is set for the region’s sharpest production increase

The US Treasury’s 22 June decision to suspend Iranian oil sanctions through 21 August has opened the way for a rapid ramp-up.

With the naval blockade lifted, tanker traffic building and US dollar transactions restored, conditions are in place for quick volume growth.

Rystad estimates Iranian output rises from 2.4 million bpd now to 3.1 million bpd by August.

If sanctions relief holds past August, output could reach 3.3 million bpd by year-end, above pre-conflict levels.

Following the 2016 Iran nuclear deal, the country added close to 1 million bpd within a year, providing a useful reference point for the pace of ramp-up.

Sustaining that growth over the medium term is a separate question.

Iranian fields carry high natural decline rates, and the country has relied on domestic contractors since international oil companies left in 2018.

Those contractors lack the capital and technology needed to reverse structural declines.

Various oilfield contracts have been issued since 2019, but most projects remain under development with limited production gains so far.

If sanctions relief proves durable and international companies return, those projects could advance. That scenario, if it materializes, is a story for 2027 and beyond.

Saudi Arabia and the UAE are positioned to grow output further

Saudi Arabia’s East-West pipeline, with a capacity of 7 million bpd, proved to be the most important single piece of export infrastructure during the conflict.

Yanbu shipments climbed from under 1 million bpd before the conflict to 3.3 million bpd in March and 4 million bpd in April and are on course for a record 4.5 million bpd in mid-June.

Saudi oil export revenues hit a near four-year high in March because elevated prices more than compensated for lower volumes on Gulf coast routes.

Even after Hormuz reopens, Saudi Arabia intends to maintain pipeline exports at current levels and is evaluating further bypass capacity.

The conflict has accelerated the UAE’s shift toward Fujairah as its primary export hub.

ADNOC is expanding its Habshan-Fujairah pipeline to lift bypass capacity from 1.8 million bpd to 3.3 million bpd by around 2027.

Having exited OPEC, the UAE now operates without a production quota ceiling.

Installed crude capacity of 4.85 million bpd is well above the 3.4 million bpd the country was producing before the conflict.

ADNOC has laid out plans to reach 5 million bpd next year, with a longer-term potential of 6 million bpd.

Restarting shut-in offshore fields is the near-term priority, followed by the Upper Zakum expansion, where contractors were selected earlier this month.

Hormuz transit volumes are the key variable to watch

The Gulf’s onshore storage tanks are currently around 50% to 60% full.

Producers have been drawing on those inventories to sustain exports while the strait was largely closed, but the available buffer is limited.

If tanker traffic through Hormuz does not normalize in the near term, countries will need to constrain production again and Rystad’s full recovery forecast reverts to its slower May trajectory, with completion pushed into 2027.

The 60-year record of Middle East production is consistent on one point: the region has recovered from every prior supply shock, including the Arab oil embargo, the Iran-Iraq war and the Kuwait invasion, and output has reached a new high after each one.

The 2026 conflict is the largest volume shock the region has recorded, and the recovery is already under way. Whether it completes on the current timeline depends on how quickly the strait gets back to normal traffic.