Will oil hit $120 a barrel or more?

A peace deal with Iran has taken a step back as Tehran has rejected Qatar’s proposals and ruled out concessions on its nuclear program, and Donald Trump hasn’t ruled out further US strikes after the midterm elections.

Even Iran’s deepening economic crisis, rising inflation, falling purchasing power and high gasoline prices in the US have done little to advance talks.

The problem with the parties’ stubbornness is that it keeps oil prices high and, consequently, inflation elevated, putting pressure on the Fed, ECB and Bank of Japan to tighten policy. For the USDJPY pair, this adds another layer of uncertainty, as higher oil prices could complicate the BoJ’s policy outlook and influence the yen’s direction.

Could things still de-escalate rather than get worse?

China seems keen to help, with a special envoy expected to visit the Middle East soon to meet regional leaders and keep the conflict from spreading, but markets aren’t buying the idea of a quick breakthrough. Polymarket, for example, still puts the odds of a US-Iran deal on the Strait of Hormuz by the end of 2026 at around 30%. 

Hence, going all-in on risky assets and gold could backfire. But betting big on the opposite scenario could be just as risky, as the only thing we know for sure is that nobody really knows whether another strike will happen, when, or exactly how it will affect oil supplies from the Persian Gulf. 

What is worth keeping in mind is that oil market fundamentals don’t justify prices this high. Traffic through the Strait of Hormuz is still flowing, albeit at reduced levels, while alternative routes, including Saudi Arabia’s East-West pipeline, remain operational. If sanctions on Russian oil continue to ease, that could also help rebalance the market.

This means that if there is no further escalation in the Middle East, oil prices could eventually correct and even fall below $100 a barrel by year-end.

But whether that scenario actually plays out remains an open question. UBS, for example, takes a more pessimistic view. The bank has raised its year-end Brent forecast from $100 to $110 a barrel, citing Middle East supply disruptions, falling inventories and record shipping costs. It has also raised its targets to $95 for March 2027 and $90 for June 2027.