The U.S. Energy Information Administration has raised its forecasts for oil prices this year and next, citing rapidly declining global inventories, tight diesel supplies and continued risks to oil flows from the Middle East amid the ongoing Iran war.

The EIA now expects Brent crude to average about $105 a barrel in the fourth quarter of 2026, $14 higher than its previous estimate. For the full year, Brent is forecast to average about $98 a barrel, an 8% increase from the agency's previous forecast, a report by Reuters stated.

The agency said exceptionally tight diesel supplies are encouraging refiners to maximize diesel production, increasing demand for crude and adding further upward pressure on oil prices.

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The EIA also pointed to attacks on Saudi Arabia's East-West Pipeline, a key export route for one of the world's largest oil producers, as a major risk to physical oil flows and prices.

U.S. retail diesel prices, which reached record highs last month, are expected to remain above $6 a gallon in October before gradually easing. The EIA forecasts diesel prices to average around $4.50 a gallon in 2027.

Strait of Hormuz disruptions keep oil markets tight

Oil and fuel prices have risen sharply since the U.S.-Israeli war on Iran began, with disruptions to shipments through the Strait of Hormuz adding to concerns over global supplies. The waterway carried roughly 20% of global oil supplies before the conflict.

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Oil prices fell about 2% on Tuesday but remained more than 37% higher than before the war began on February 28, Reuters reported.

Iran has also targeted regional energy infrastructure, further disrupting crude production and exports and contributing to tighter global supplies.

The EIA expects oil flows from the Middle East to remain constrained through the fourth quarter of 2026. However, regional production shut-ins in September were estimated to have fallen to their lowest level since the start of hostilities.

Middle Eastern oil production and exports are expected to gradually recover as transit through the Strait of Hormuz improves and producers increasingly use alternative export routes and ship-to-ship transfers.

Saudi Arabia has restarted shipments through its East-West Pipeline following attacks by Houthi forces, while regional exporters have adapted to attacks on shipping and energy infrastructure by using alternative transportation routes and so-called dark transits.

These measures have helped Gulf oil flows, excluding Iran, recover to more than 81% of pre-war levels in September, Reuters reported.

The EIA expects crude production shut-ins to decline from 4.5 million barrels per day in the fourth quarter of 2026 to 2.7 million bpd in the first quarter of 2027 as alternative export routes and other workarounds expand.

As Middle Eastern supplies recover and global inventories rebuild, Brent crude is expected to average $84 a barrel in 2027. That is $10 higher than the EIA's previous forecast.

U.S. crude production set for another record

The EIA expects U.S. crude oil production to rise to a record 14.3 million barrels per day in 2027 from 13.9 million bpd in 2026, which would also mark a record.

U.S. petroleum demand is forecast to fall to 20.6 million bpd in 2026 before rebounding to 20.8 million bpd in 2027.

Higher U.S. production, a gradual recovery in Middle Eastern oil flows and rebuilding global inventories are expected to ease market tightness next year. However, the EIA's higher price forecasts highlight the continued risks to global energy markets from the Iran conflict and disruptions to critical oil infrastructure, the report stated.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)