Persian poet and mathematician Omar Khayyam wrote: “The moving finger writes and, having writ, moves on.” The initiation of military operations by the US and Israel against Iran on 3 March was a transformational moment not only for the Gulf region but also for global oil markets—one from which there is no return.
No matter how this war ends, or what objectives are ultimately achieved, there will be no reverting to the previous status quo. Since the onset of US/Israeli military action, the oil market has struggled to find a new equilibrium, with multiple, short-lived equilibriums forming and fading as events unfold and perceptions of the conflict’s impact on current and future fundamentals shift from day to day.
At times, intraday price adjustments have been severe, with risk premiums embedded in prices rising and collapsing, leading to a more than $30/bl swing on 9 March in the prompt Brent futures contract and bid-offer spreads widening from cents to dollars as traders scrambled to determine a fair-value for the price for oil.
At the time of writing, front-month Brent futures were trading below $110/bl. The obvious question is why the flat price is not materially higher, given the volumes of crude oil at stake in the conflict with Iran are orders of magnitude greater than those at risk at the onset of Russia’s war in Ukraine, when Brent quickly climbed to $120/bl. Meanwhile, in contrast, Middle Eastern physical markets have seen Dubai partials establish themselves above $150/bl. Albeit, this high flat price assessment was part driven by methodological changes implemented by price reporting agency Platts at the start of hostilities that diminished liquidity, leaving Oman crude, for all intents and purposes, to set the price of the benchmark.
Price positions
So where should the price of oil be under these market circumstances? Are we facing an unavoidable catch-up in Brent futures contract with the physical price signal from the Middle Eastern benchmark?
Basic economic theory offers two frameworks for equilibrium. Under a Keynesian view, prices are sticky and adjustments occur through changes in quantity or volume. This perspective is often reflected in the analytical approach of market participants constructing oil balances, seeking the so-called ‘solver’—where supply will come from to fill deficits and which regions are likely to absorb surpluses.
By contrast, a neoclassical framework assumes prices adjust immediately to restore equilibrium. Drawing a parallel from the theory of exchange rate determination, economist Jacob A. Frenkel’s model assumes instantaneous adjustment, while economist Rudi Dornbusch’s overshooting model suggests prices may overshoot or undershoot equilibrium as financial markets move faster than the real economy, which in our case is the changes in the quantities of supply and demand.
In practice, both mechanisms operate simultaneously, with the relative importance of price and volume in the adjustment to a new equilibrium dependent on market structure. The key question, therefore, is which, of price or quantity, must do the heavy lifting in restoring balance and allowing Brent to find a new, potentially stable equilibrium. Oil demand is unlikely to shift significantly without a sharp economic downturn, whereas supply is subject, in the current environment, to more immediate and abrupt changes depending on whether the conflict unfolds into even greater outages. Financial oil prices will, as usual, respond immediately to changing perceptions of supply and demand.
The principal shock from the conflict in the Gulf stems from disruption to the global supply chain following the effective closure of the Strait of Hormuz. This closure is risk-induced, driven by prohibitive insurance costs and the reluctance of shippers to transit the waterway amid the threat of Iranian attack, be it from missiles, drones, mines or unmanned rapid attack boats. While flows have not ceased entirely—with tankers linked to China or authorised by Iran reportedly still transiting, and Iranian crude continuing to move in limited volumes—large quantities of oil are now trapped within the Gulf.
Shutting in and letting out
As onshore and offshore storage approaches capacity, producers are forced to shut in production at the wellhead. Iraq, with more limited storage, has been particularly affected, while Saudi Arabia and the UAE retain some flexibility through alternative export routes via Yanbu on the Red Sea and Fujairah on the Gulf of Oman. In the case of Saudi Arabia and the UAE, strong export volumes in February may also have generated some additional storage capacity headroom prior to the conflict. Nevertheless, regional crude and condensate production shut-ins are estimated by most sources to amount to over 10m b/d, some of which may not be fully recovered if reservoir damage was incurred during the period of shutdowns, particularly in low pressure reservoirs such as those found in Iraq.
Against this backdrop, the IEA announced on 11 March the release of 400m bl of strategic stocks—the sixth such intervention and the largest to date. IEA member countries in the Americas will release crude oil, while those in Europe and Asia will release a mix of crude and refined products, with Asia placing greater emphasis on crude.
While the release could provide a temporary volumetric bridge to the eventual normalisation of flows through Hormuz, Brent futures did not decline on the day of the announcement. Beside the fact this 400m bl would cover only around a month equivalent of the current crude and product loss through Hormuz, the lack of price retrenchment may reflect the fact that the released volumes are directed towards IEA member countries, rather than major non-OECD importers of oil such as China and India, which are most exposed to disruptions in flows.
As such, the geographical mismatch limits the effectiveness of the stock volume response, alongside logistical constraints on daily flow rates, even acknowledging the fact that such stock releases help free up barrels for non-IEA member countries. In the case of the US, the release is a time swap to be returned in fairly short order. Moreover, despite China’s build-up of strategic reserves in 2025 and early 2026, there is no official indication that these stocks will be drawn down. India, meanwhile, may rely on Russian crude oil in floating storage following a US waiver, although this is unlikely to provide more than short-term relief. For India, Russia will need to ramp up crude exports after a sharp decline in February. As a result, Brent in the first instance reached and held above $100/bl.
Most recently, Brent futures moved higher, trading above well above $110/bl only to unravel towards $105/bl at the time of writing on 19 March. There are as yet no widespread calls among sell-side bank economists for severe recession risks to materially impact demand.
A new equilibrium
The US five-year breakeven rate—the market-implied measure of expected average inflation over the next five years—has risen towards 2.7% but remains below the peaks seen in March 2022, when it hit 3.6%. Both the Federal Reserve and the European Central Bank have opted to hold policy rates steady, awaiting clearer signals on the impact on inflation of higher oil prices, if sustained, thereby reducing the likelihood of an ill-timed near-term policy response that could trigger an economic slowdown and oil demand destruction. Thus, both actual and expected oil supply dynamics will be the focus of the quantitative adjustment to establish an equilibrium.
This does not imply that equilibrium will be stable. Market sentiment remains highly sensitive to daily developments, and speculative flows can drive sharp price movements in either direction. In the here and now, crude oil exports from OPEC countries were down by more than 12.5m b/d on 15 March relative to their recent four-week average, according to data from oil trade analytics company Petro-Logistics.
Focusing on Gulf producers, Saudi Arabia’s and Kuwait’s exports (excluding the Neutral Zone) were down by 4.3m b/d and 1.1m b/d respectively, while UAE exports were lower by 1.7m b/d and Iraqi exports by more than 3m b/d. These losses far exceed the volumes released by the IEA’s emergency stock measures while, at the same time, there is no clear timeline for a return to normal export levels. Efforts by the US to encourage allied and even Chinese participation in securing navigation through Hormuz have initially been rejected, given the intensity of the conflict and there being no ceasefire in sight.
However, the UK, France, Germany, Italy, the Netherlands and Japan jointly expressed on 19 March a readiness to contribute to appropriate efforts to ensure safe passage through the strait as well as welcomed the commitment of nations engaging in preparatory planning. As such, a near-term resumption of flows, allowing for a logistical and scheduling ramp-up period, is unlikely to return anytime soon, suggesting quantity, or in this case the loss of it, makes the supply curve near vertical and less conducive to helping establish the market equilibrium.
New supply
With these export volumes effectively removed from the supply chain, attention turns to non-OPEC+ supply growth as a potential offset. The IEA estimates that non-OPEC+ supply will increase by 1.2m b/d in 2026, reaching 56.2m b/d, with most growth concentrated in the Americas. Other estimates suggest growth could be larger, but not by much. Gains are expected from US crude and NGLs, as well as increased output from Brazil, Argentina and Guyana.
Canadian oilsands production growth is likely to be modest, while capacity constraints on the Trans Mountain Expansion pipeline limit incremental exports to Asia. There is also speculation the US could cap crude exports or introduce export tariffs to contain oil prices at home, but there is no official announcement to support this at the time of writing. So, quantity-wise, there is no immediate solution to allow the oil price to deflate, with speculators selling the fact, having bought the rumour.
Overall, the projected non-OPEC supply increase this year is likely insufficient to materially offset losses resulting from a prolonged period of disruption in Hormuz. Asian buyers may have to increasingly turn to Atlantic Basin crudes, competing for West African and other supplies, and in so doing narrow the gap between physical Brent and Dubai prices, although this has yet to be visible.
Infrastructure risk
More recently, a new risk premium has emerged related to the integrity of energy infrastructure. Thus far, the conflict with Iran has not seen an attack on the scale of the 2019 strikes on Saudi Arabia’s Abqaiq and Khurais facilities. Iran’s strikes on its neighbours’ energy infrastructure could, until recently, be described as worrisome rather than outright disruptive or destructive, often hitting storage facilities and not impairing operations. Attacks have been reported on Saudi oilfields, the Ras Tanura refinery, the Samref plant, the port of Yanbu, Kuwait’s Mina al-Ahmadi refinery, the port of Fujairah, the Ruwais refinery, the Shah gas field in Abu Dhabi and Bahrain’s Bapco refinery.
However, Israel’s strike on Iran’s South Pars gas field marked a new escalation. Iran’s retaliation against Qatar’s Ras Laffan LNG and GTL complex, causing significant damage, prompted Doha to expel Iranian military and security attaches. Iran’s attack has reportedly affected 17% of QatarEnergy’s gas export capacity, which could take 3–5 years to repair, according to CEO Saad al-Kaabi, and lead to the declaration of force majeure on long-term contracts with Italy, Belgium, South Korea and China.
It would also seem that Murban producing fields at Bab and Habshan were targeted. Following earlier missile attacks on Riyadh, Saudi Arabia indicated it reserved the right to respond militarily. US President Donald Trump’s strongly worded response on his Truth Social platform—indicating there would be no further Israeli attacks on South Pars but warning the US would “massively blow up the entirety” of the field if Iran targeted Qatari LNG facilities again—has done little to reassure markets, even if he may have meant it to be de-escalatory.
The risk of greater supply disruption is rising, extending beyond the interruptions to flows through Hormuz, which some view as eventually being resolved, releasing oil back into the market. Depending on the magnitude of damage, restoring energy infrastructure could take much longer than restoring transit through the strait, and thus would involve a more prolonged supply outage.
At this stage, prices will need to bear the burden of adjustment for any new equilibrium, but it could be messy as the market tries to separate signal from noise. Brent futures may ultimately converge towards the physical Dubai benchmark, with a potential move towards $150/bl. However, in the near term, it is more likely—if no de-escalation takes place—for Brent futures to converge first towards UAE’s Murban crude valuation, which recently crossed above $125/bl, before it takes aim at catching up with Dubai.
This, in my opinion, is likely to come even as Treasury Secretary Scott Bessent dismisses rumours of intervention in financial oil markets and raises the possibility of easing sanctions on Iranian crude already on water and conducting unilateral US SPR releases.
Harry Tchilinguirian is former head of research at Onyx Capital Group, head of oil research at TOTSA (TotalEnergies), head of commodity research at BNP Paribas and senior oil analyst at the IEA.
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