Welcome to Dispatch Energy! In my last newsletter, I argued that the Iran war and the closure of the Strait of Hormuz represented the largest oil supply shock in history. I warned of truly dire consequences for the global economy should the disruption persist: “The global oil industry will have no hope of filling that supply hole this year or next (or next).” Yet, we are now exactly two months into this crisis and crude oil prices are still hovering around the $100 per barrel mark. What gives?
First and foremost, it’s worth noting that the fundamental market challenge remains unchanged and its effects continue to worsen by the day. The Strait of Hormuz is still closed and, as a direct result, roughly 13 million barrels of Middle Eastern oil production capacity—out of a roughly 105 million barrels-per-day market—remain forcibly shut in. Those unproduced barrels are still the core challenge facing the oil market: The cumulative impact now stands at roughly 600 million barrels. Even if the Strait of Hormuz fully reopened on May 1 and we assume the most optimistic lagged restart timelines, we’re looking at roughly 1 billion barrels of Middle Eastern oil that will have gone unproduced relative to what the oil market expected heading into 2026.
While the large-scale disruption in oil production is undeniable at this stage, market pricing is always debatable. And there has been a furious debate about what price of crude oil, exactly, is warranted by the Hormuz crisis. Cards on the table: I, along with many of my oil analyst peers and colleagues, am surprised that prices haven’t reacted more forcefully to the dead stop of such a vast quantity of Middle Eastern oil. But rather than surrender to widespread claims of “market manipulation” by the U.S. Treasury, it’s important to try to understand the market on its own terms.
The best explanation for the pullback in crude pricing through this month is the combination of the April 8 ceasefire, presidential jawboning, and, fundamentally, the lack of realized inventory declines to problematic levels to date. Most recently, the ceasefire materially shaved off some of the worst tail risks, including more direct attacks on regional production infrastructure. Meanwhile, the White House’s desperate attempts to talk down market reactions have distorted market behavior. Finally, commodity markets have difficulty pricing risk before scarcity physically arrives, so we’ve seen much of the pricing pressure manifest at the very front of the futures curve and in the physical market.
Let’s start with the good news: The ceasefire temporarily reduced the threat of a major escalation, triggering an entirely warranted pullback in crude prices. Flat crude prices collapsed by nearly $20 per barrel through the next day and the steepness at the front of the crude futures curve, which had been indicating record tightness in near-term physical markets, also deflated. The White House appears reluctant to ramp up attacks on Iran, trimming back the biggest tail risk: namely, continued military escalation, U.S. boots on the ground, and/or more direct attacks on upstream oil and gas infrastructure in Saudi Arabia or the other exporting Gulf states.
While we can anticipate that it will take weeks to months to return to pre-war production levels, damage to oil infrastructure would all but guarantee far larger and longer supply disruptions, even if traffic through the strait resumes. And Iran has proven entirely willing to escalate in its retaliatory strikes. Following an Israeli attack on Iran’s South Pars natural gas project, Iran struck the Qatari Ras Laffan liquefied natural gas facility—a move that reduced Qatar’s LNG export capacity by 17 percent for up to five years, according to the CEO of Qatar Energy. During periods of active combat, markets must contend with this instability as they price the probability of tail risks: Even a 10 percent chance of more durable destruction across Middle Eastern oil production capacity is worth a lot. As long as the fighting remains on pause, the market can more easily disregard this frightening scenario.
Another, more idiosyncratic, element of the Iran war oil shock has been frequent and strongly worded verbal interventions by the White House. Since at least the second week of the war, President Donald Trump has routinely made social media posts or hinted to the media that the war was nearly complete. These interventions have routinely cratered crude prices by $10 to $15 per barrel in a single day. That kind of volatility discourages financial participants from taking larger positions in futures markets; in other words, investors are not willing, or even able, to bid prices higher. And, of course, it makes sense that traders are reacting to Trump’s announcements: It’s Trump who will, ultimately, be the one to decide when this war ends.
I continue to expect that the strait will only reopen after the Trump administration cedes ground on current diplomatic disagreements with Tehran. Prices have frequently sold off in anticipation of Trump “TACO-ing,” but paradoxically, the oil selloff itself reduces the pressure that would be required to force any concessions. Both sides of the war continue to believe that they are winning, which diminishes the prospect of compromise. Trump will only make significant concessions when financial markets force his hand, and as of yet, the market isn’t anywhere near those levels.
Finally, there’s a structural reason that crude prices haven’t shot higher more quickly in the face of a gaping hole in global supply. I’ve long argued that oil futures aren’t especially good at manifesting the market’s collective forward view. In the words of energy analyst Jeff Currie, commodities aren’t “anticipatory assets.” Rather, the primary job of price—and shape of the futures curve—is to clear spot market imbalances between supply and demand.
So, my error—in assuming a faster incorporation of the Middle Eastern supply loss into market pricing—may have in fact been a violation of my own cardinal rule: I expected the market to anticipate the inevitable and acute decline in global inventories and for prices to rise accordingly. Instead, crude prices appear to be following a show-me path, only grinding higher alongside realized and visible inventory drawdowns. Through this lens, there’s a reasonable argument that the initial price spike was a fear-induced overreaction to the Hormuz shock—not in scale, per se, but in timing.
Let’s abstract away from the Hormuz of it all and instead imagine that a massive, 10 million barrel-per-day pipeline connecting a critical source of supply to the world market suddenly goes offline. Roughly 10 percent of global supply has been lost and the disruption is expected to be temporary or, at least, not durable. Leading to this catastrophe, the oil market was oversupplied, inventories were built up, and prices were under protracted downward pressure. In this scenario, it would make sense that prices would be driven higher only after a punishing passage of time and heavy drawdown of commercial stockpiles. The only required market reaction would be for near-term deliveries to trade at a premium to later-dated ones, which is essentially the market’s signal to inventory-holders to dump their stocks to help fill the supply hole.
And that’s exactly what we’ve seen: The impact of the closure of the Hormuz has been most visible in spot prices or, as Bloomberg illustratively called them, “ASAP barrels.” While (still) elevated commercial inventories continue to provide a healthy buffer to upward pressure on the curve, that ASAP barrel premium is having its intended effect, driving a 10 million barrel-per-day decline in visible stocks—including oil on water and onshore inventories—on average through early April.
However, there is no doubt that a sustained closure of Hormuz will continue to grind prices ever higher. If even half of that 10 million barrel-per-day decline in visible stocks through early April is realized and Hormuz remains closed until summer, historical relationships between prices and inventory levels would put us near $200 per barrel prompt Brent futures by June or July (see my Substack for a deeper discussion). And, concerningly, the New York Times reported Monday that members of the Trump administration are pushing for a longer pressure campaign against Iran, believing “that continuing the blockade for two more months would cause significant long-term damage to Tehran’s energy industry.”
Essentially, we have a situation where oil markets are stuck waiting for the arrival of the tidal wave that we’re all pretty sure is coming down the pike—and soon.
Policy Watch
- In a shock move, the United Arab Emirates (UAE) on Tuesday announced its decision to leave the Organization of Petroleum Exporting Countries (OPEC), effective Friday. The country’s official statement stressed that the move “reflects the UAE’s long-term strategic and economic vision and evolving energy profile, including accelerated investment in domestic energy production, and reinforces its commitment to a responsible, reliable, and forward-looking role in global energy markets.” There have been countless premature OPEC obituaries written over the years, and they’ve all turned out to be wrong. While I expect the producer group to muddle through this latest blowup, too, make no mistake: The UAE’s departure is a massive crack, arguably the biggest in OPEC’s storied 65-year history. The UAE—thanks to its large output, spare capacity, and political sway—was the second most important member of OPEC, behind only Saudi Arabia. Going forward, OPEC will become even more Saudi-dominated, and the UAE’s exit also ups the odds for further defections. It also very likely means a large infusion of Emirati oil into the eventual postwar market.
- Last week, President Trump extended a temporary waiver of the Jones Act, prolonging his 60-day exemption for another 90 days. The Jones Act is a more than 100-year-old law requiring that any goods transported between U.S. ports be carried by ships that are U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-crewed. In addition to the added operational costs, the law’s stringent requirements vastly reduced the opportunities for U.S. petroleum products to be shuttled between domestic ports. With the Jones Act waived, the Gulf Coast can more directly service U.S. imports on the East and West coasts, modestly reducing the cost of imported fuel into those markets. This exemption was one of the first major actions taken by the Trump administration to help offset the domestic energy price shock stemming from the Iran war, and its extension could indicate that U.S. officials expect the conflict to persist.
Further Reading
- Earlier this month, President Trump posted “Great!!!” over a screenshot of a tweet (disclosure: from me) highlighting the large volume of oil tanker traffic “heading to the U.S. to pick up some desperately needed crude for Hormuz-starved markets.” And while U.S. consumers will still no doubt feel the heat of rising global oil prices when they go to the pump, there’s little doubt that North America is now the most energy secure region in the world. U.S. exports will also undoubtedly boom because, at least for now, other importers are willing to pay more for those barrels than U.S. consumers. To wit, the Financial Times published a comprehensive and visually compelling long read on how “America’s bid for energy supremacy is being forged in war,” which digs deeper into that armada of U.S.-bound tankers and the shifting currents of U.S. energy trade. In the longer term, the Hormuz crisis has reminded the world of the unreliability of Middle Eastern energy, dramatically bolstering the energy security case for striking trade and investment deals anchored by North American energy exports.
