26th August 2026
The oil price falls below $89 is telling us that the oil market is currently putting more weight on the possibility of easing geopolitical tensions and weaker demand than on the very serious supply problems in the Middle East.
Brent fell by more than 3% today, reaching about $89.10 a barrel, while WTI fell to about $82.08.
Why has oil fallen so sharply?
1. Markets think the Iran situation might eventually de-escalate
This is probably the biggest immediate factor.
The US has announced much tougher economic pressure on Iran, but the measures announced by Treasury Secretary Scott Bessent were less severe than traders had feared. There are also reports of diplomatic activity involving Pakistan and Iran.
That has produced an unusual market reaction: rather than assuming sanctions mean less Iranian oil, traders are asking whether the economic pressure might eventually bring Iran back towards negotiations.
If the conflict eases, the enormous "risk premium" built into oil prices can disappear very quickly.
2. The Strait of Hormuz risk has not disappeared — but markets are pricing it differently
This is perhaps the most important point.
The IEA says the Strait remains severely disrupted and that millions of barrels of potential supply remain affected. Global inventories have also fallen dramatically.
So the fundamentals haven't suddenly become comfortable.
Instead, traders are effectively saying:
"Yes, there is a supply problem — but perhaps it won't get substantially worse."
Oil prices are driven by expectations of what will happen next, rather than simply by today's physical supply.
3. Demand is looking weaker
The IEA has made a substantial downward revision to its oil-demand forecast. It now expects global oil demand to fall by 1.6 million barrels a day in 2026.
That is significant.
Higher fuel prices themselves encourage consumers and businesses to use less oil. Economic weakness also reduces industrial activity, freight and transport demand.
So there is a self-correcting mechanism: high oil prices create some of the conditions that eventually push oil prices lower.
4. Traders had already pushed the price up enormously
This is easy to overlook.
The IEA says North Sea Dated crude rose by more than $25 a barrel during July, ending the month at $96.80, after prices briefly reached around $105.
When a commodity moves that quickly, traders build expectations of further rises into the price.
Once the news flow changes, some of those positions are unwound very quickly.
That can make the fall much faster than the underlying physical change in oil supply would suggest.
And this is where the predictions went wrong
You were right to notice the contrast with the predictions of $100-plus oil.
Those forecasts weren't necessarily irrational. At one point the market had an extraordinarily dangerous combination: the Gulf supply disruption, the Strait of Hormuz problem, attacks on infrastructure and tankers, falling inventories and uncertainty over Iran.
The IEA itself described July's oil market as having an exceptionally wide trading range of almost $40 a barrel.
But that demonstrates something important about oil forecasting.
A forecast of $100 oil is not necessarily a forecast that oil will stay at $100. It may simply be a calculation of what happens if the worst-case scenario develops.
And the worst case hasn't happened — at least not yet.
There is another fascinating twist
The US sanctions announcement might actually have reduced the immediate oil risk premium rather than increased it.
That sounds backwards.
But if markets believe economic pressure could eventually produce negotiations, then the prospect of a prolonged military confrontation — and potentially an even more severe closure of Hormuz — becomes slightly less likely.
Reuters reported today that investors were effectively favouring the possibility of economic rather than military escalation.
That is why oil can fall on news that, on the surface, sounds like it ought to push it higher.
But I wouldn't conclude that the oil crisis is over
This is the really important qualification.
The IEA still expects global oil supply to fall by about 4.3 million barrels a day in 2026, while inventories have already been heavily depleted. It estimates observed global stocks fell by 69 million barrels in July alone and were 410 million barrels below their level at the start of the war.
So today's sub-$90 price is not evidence that the underlying supply situation has returned to normal.
It is more accurately the market saying:
"We don't think the situation is going to get significantly worse from here."
If that assumption proves wrong — particularly if Hormuz becomes even more dangerous — $90 could look remarkably cheap.
Conversely, if diplomacy progresses and more oil begins moving normally, the price could fall considerably further.
And that is why I think your earlier observation about oil unexpectedly dropping despite all the dire predictions is particularly interesting: the oil market has become a market for geopolitical expectations as much as a market for barrels.
For rural Scotland, including Caithness, that matters enormously because a $10 or $20 change in Brent doesn't immediately translate into the same change at the petrol pump or in heating-oil prices — but it can eventually feed through into diesel, transport, fishing costs, heating oil, food distribution and inflation.
We should be cautious about using the recent fall as evidence that the next fuel shock has been cancelled. It may simply have been postponed by a change in expectations.