Week Ending July 10

Crude Reprices Geopolitical Risk as Market Balances Escalation Against Looser Fundamentals

This week, crude markets shifted away from pricing a smooth recovery in the Middle East and began assigning a higher probability that tensions between the US and Iran could remain elevated throughout peace talks. Rather than signaling a return to widespread supply disruptions, the latest military exchanges suggest shipping through the Strait of Hormuz is settling into a more fragile operating environment that remains far from full normalization.

Despite multiple days of US strikes, Iranian retaliation, and reports that vessel traffic through the Strait of Hormuz slowed to near-halt conditions, both countries largely avoided attacks on major oil production and export infrastructure. That distinction appears increasingly important to traders, who are becoming more selective in assigning geopolitical risk premiums, responding primarily to events that threaten physical crude supply rather than military escalation alone.

While geopolitical headlines supported prices, the underlying supply outlook continued moving in the opposite direction. The EIA significantly reduced its forecast for global inventory draws during the second half of 2026, reflecting expectations that Gulf production and exports will continue recovering following the memorandum of understanding. The agency now expects WTI to average roughly $71/Bbl during the third quarter and about $61/Bbl in 2027 as global inventories move back into sizeable surplus.

The result is a market caught between two competing narratives. In the short term, renewed military activity and uncertainty surrounding the future of US-Iran negotiations continue to support a geopolitical risk premium. Over the medium term, however, producers are restoring output while forecasters increasingly expect global supply growth to outpace demand. Even the IEA cautioned that additional fighting could delay inventory rebuilding rather than permanently alter its expectation for a looser market next year.

For now, crude appears to be trading in a middle ground between conflict and normalization. Markets are no longer pricing the severe supply disruptions seen during the height of the war, but neither are they assuming a smooth return to pre-conflict conditions. Until negotiations produce greater clarity, or military activity begins disrupting physical exports more directly, crude prices are likely to remain caught between a persistent geopolitical risk premium and an increasingly bearish supply outlook.

Natural gas plunges on Freeport outage, milder weather

The August Henry Hub contract lost 29c this week, bringing losses over the past two weeks to -37c. The prompt contract settled at $2.90/MMBtu this week, the lowest price for that contract so far this year. Selling pressure extended to the next several seasons as well. Winter ‘26/’27 lost 16c to settle at $3.58/MMBtu and Summer ’27 fell 9c to finish at $3.04/MMBtu. This comes after prompt prices traded in a very narrow range throughout June and early July and primarily occurred on Thursday and Friday as LNG maintenance and cooling weather forecasts implied sharply lower demand.

On Thursday, Freeport LNG announced they would begin maintenance starting Friday and extending through “late next month”. They declined to comment further on either the timeline or magnitude of the outage. This resulted in a sizeable selloff on Thursday as traders assessed the possibility of a significant outage. On Friday, pipeline nominations implied one of Freeport’s three trains was down. If work does conclude around the end of August, and one train is worked on at a time, that would result in about 30 Bcf of cumulative lost gas demand. A two train outage would be about 60 Bcf, and if all three trains are taken offline, as much as 90 Bcf. Often in the past, Freeport LNG outages have lasted longer than their initial guidance implied.

In addition to the surprise maintenance, two-week weather forecasts took a bearish turn on Friday. While Lower-48 population-weighted temperatures are still forecast to warm significantly next week, Friday’s Euro Ensemble run shortened the duration of the heat wave substantially. This forecast changed removed about 9 Bcf from the 14-day demand outlook and added to selling pressure which was already present in the market.

A third bearish event this week was the EIA storage report on Thursday. While the reported injection came in close to estimates, it was larger than the five-year average injection for the corresponding week. This week’s report expanded the surplus by 10 Bcf, bringing inventories to +185 Bcf above the five-year average. Since the start of June, the storage surplus has increased by 47 bcf, pressuring the Winter ‘26/’27 seasonal strip to new multi-year lows.