Surging 41.6% in March, Brent crude recorded its sharpest monthly gain in history, narrowly surpassing the 41% rise seen in May 2020. This is the most tangible fallout from the war in Iran, started by the United States and Israel on February 28. In just a few hours, the equilibrium of the oil market was completely upset, shifting from a supply surplus to the de facto closure of a transit point for 20% of global oil supply.
March was also characterized by an unprecedented spread between the two primary oil benchmarks, Brent and WTI: On March 19, this gap reached $20. The divergence reflected the fact that US oil production remains unaffected by the Middle East conflict, alongside various measures implemented or considered by the White House. However, the notion that the US is immune to the conflict's consequences proved short-lived. The Brent-WTI spread has since normalized, trading around $2 to $3 this morning.
Short-lived excursion, heavy consequences
Donald Trump now clearly wants to end the conflict in Iran, which has allowed prices to stabilize around the $100 mark. Yet, this may not be enough to durably ease price pressures. Indeed, hostilities must cease between both the other parties (Israel and Iran), and the Strait of Hormuz must be fully reopened to navigation.
Even if this were to happen tomorrow, it would take weeks, if not months, to restore normal supply chains again. Shut-in production must be restarted, infrastructure repaired and logistics reorganized. In the meantime, the consequences of this supply disruption will become increasingly concrete every day.
Furthermore, Donald Trump has suggested that the Strait of Hormuz is no longer his problem. The US has done its part; countries dependent on Middle Eastern hydrocarbons will have to fend for themselves.
Under normal conditions, 20 million barrels per day pass through the Strait of Hormuz. According to Bloomberg oil specialist Javier Blas, the use of corporate inventories, state strategic reserves, and the rerouting of some flows via the Red Sea have absorbed 60% of the loss, or approximately 12 million barrels per day. This leaves a deficit of 8 million barrels per day.
Prices are therefore expected to remain under pressure as this imbalance filters through to the physical market. In an interview with Bloomberg yesterday, Michael Haigh, Head of Commodities Research at Société Générale, noted that the closure of the Strait of Hormuz is beginning to manifest as shortages. "The last vessel carrying jet fuel to the UK will arrive in 48 hours, and there will be no more after that," he stated.
Historical precedent shows that the market impact of an oil shock can last far longer than the conflict itself: the 1973 Yom Kippur War. This was highlighted by another Bloomberg columnist, John Authers, on Tuesday. The S&P 500 peaked the day after the ceasefire announcement on October 25, 1973. However, the index subsequently plummeted by approximately 40% over the following twelve months. Higher energy prices weighed heavily on the global economy.
It should be noted, however, that the rise in oil prices at that time was of a different magnitude: a 277% surge in six months. An equivalent move today would send Brent to a staggering $275.
