Last week was a volatile week for oil with a number of key events dominating global headlines with the ongoing Middle East conflict. While the state of the ceasefire attempt to stand on shaky grounds, President Trump’s naval mission dubbed “Project Freedom” to escort stranded ships out of the Strait of Hormuz has added fire to the situation with Iran considering this a violation of the ceasefire by the US. The uncertainty of the war along with the conditions of the ceasefire and the Strait have been sending ripple effects across the oil market with oil prices seeing sharp highs during the previous week. This together with a number of other developments in the OPEC+ oil supply has also altered the outlook on the oil market for both 2026 and 2027.
Oil price hits a wartime high last week
The global benchmark oil prices, Brent crude rose above $120 a barrel last Wednesday, briefly soaring to a wartime high of $126.41, its highest since 2022. This was after Brent crude dropping to $90 a barrel on the 17th of April, after a ceasefire between Israel and Lebanon was announced where the US claimed it would pause all attacks on Iran. Despite this, oil prices continued to average at a much higher rate than the pre-conflict prices and nearly doubled since the start of the year when tensions between Washington and Tehran began escalating.
Despite the ceasefire, oil prices continued to rise over the last 2 weeks with the US continuing its blockade in the Strait of Hormuz and President Trump warning that the blockade could last months while peace talks continue to remain uncertain and stalled. US officials hope the blockade will force Iran to cap its oil wells and shutter production once its oil facilities, such as Kharg Island, have filled to the brim.
While prices have since retreated down to $100-110 ranges, analysts are warning than an extended interruption to oil into the second half of the year could tip the global economy into recession with countries already facing heightened inflationary pressure, fuel shortages, weakened household consumption and slower growth. Vandana Hari, founder of Vanda Insights, said that oil prices have “nowhere to go but up”, until the permanent reopening of the strait comes into view. Janiv Shah, vice president of oil markets at Rystad Energy, said any further military escalation could trigger even steeper price gains.
UAE leaves OPEC in a blow to oil cartel during war
Meanwhile, on Tuesday, the United Arab Emirates announced that it would be leaving the Organization of Petroleum Exporting Countries (OPEC) and its sister organization, OPEC+ from the 1st of May reflecting the country’s “long-term strategic and economic vision and evolving energy profile”. With UAE, a member that produces nearly 4.8 million barrels a day and nearly 4% of global oil supply, leaving the OPEC coalition could weaken the oil cartel at a time where Gulf producers have already been struggling to export through the Strait of Hormuz.
While the UAE Energy Minister Suhail Mohamed al-Mazrouei said that the decision was taken as a policy decision “after a careful look at current and future policies related to production levels”, it adds to the OPEC’s declining influence over the oil market. With the OPEC’s third largest oil exporter leaving the organization taking with it, 15% of its capacity, OPEC’s declining share of oil could mean a more open oil market. It also means that the country will now be free to increase its oil output in the long-term at its own discretion.
OPEC+ announces 188,000 barrels-per-day output increase in first meeting without UAE
On Sunday, OPEC+ announced that it would increase its daily output by 188,000 barrels a day to send a signal that it was conducting business as usual after UAE’s announcement. This decision was largely symbolic with the ongoing oil crisis due to the supply that is choked off by the war. This was the second announced supply increase in the last 2 months following a previous decision in early April to raise oil production quota by 206,000 barrels a day.
This announcement could cushion the oil crisis to a certain extent and if supply is increased, could possibly lower the highly elevated global oil price from its current level. Oil prices also fell on Friday by around 3%, following an updated peace proposal from Iran that was sent to Pakistan raising hopes of a possible peace settlement with the US.
What this means for Sri Lanka?
Sri Lanka has already been experiencing the brunt of the Brent prices since March, with a relatively higher oil bill, widening trade deficit and elevated inflationary pressure. This was visible through the declining Current Account Surplus due to a 122% YoY increase in its trade deficit for 1Q26. In March alone, Imports increased 30.3% YoY to $2.13 Bn with fuel imports being its biggest driver surging 74.7% in March due to higher global prices. April also experienced its highest inflation since February of 2024 with a 5.4% YoY inflation largely due to price increase in Petrol, Diesel as well as Gas prices in March and April.
Financial Times is warning that Asian economies could experience further inflation pressure if the ongoing conflict continues for a few more months while ADB has sharply downgraded Asian and Pacific regional growth outlook as ME conflict disruptions deepens further. However, there is a renewed sense of hope on some level of peace negotiation with Iran’s Foreign Ministry stating that it is reviewing US’s response to its ceasefire proposal and it will issue a reply after completing its assessment.