Many (most?) of the day-to-day gyrations in the oil price reflect scares or hopes of the moment. There is only so much information that can be derived from them. On the other hand, physical realities cannot be wished away.
The oil market is four weeks away from a “tipping point” that will drive prices significantly higher, traders have warned, as the blockade in the Strait of Hormuz reduces global stockpiles below critical levels.
Markets are beginning to price in the chances of a much longer conflict, after President Donald Trump told oil company executives on Thursday that the blockade of the Strait of Hormuz could “continue for months.”
Traders and analysts warned that global stocks of crude, gasoline, diesel and jet fuel will hit critically low levels by the end of May, at which point prices will escalate rapidly.
As I write, Brent crude (the main European benchmark) is trading at just under $110, up from the mid-$60s a year ago; West Texas Intermediate (WTI: the primary U.S. benchmark) is trading at a little below $103, compared with about $60 at the end of beginning of May 2025.
That’s in line with warnings from Fatih Birol, the head of the (sometimes annoying) International Agency (IEA) six weeks ago. He is now referring to “the largest energy crisis we have ever faced.” The crunch is already well underway in aviation fuel (the rise in its price was a contributory factor in the final collapse of Spirit Airlines, although that airline’s demise has been in the cards for some time). Worries about supply and/or price are already causing some flight cancellations and price hikes on both sides of the Atlantic, although the number of cancellations remains modest for now. According to a separate FT report, the total number of seats available on all airlines during May has fallen from 132m to 130m between mid- and late April.
The IEA has launched a policy tracker on the response taken by governments to the crisis. Predictably enough, some of the measures taken have included steps designed to advance the futile energy “transition.” This will make no difference to the climate or to current shortages. Asia, however, is already seeing early signs of 1970s-style rationing.
Markets may well be too sanguine. Brent October futures are trading at around $96 (again, as I write), a price below current levels, implying that the trudge back to normality will be underway by then. October WTI is trading at around $86, delivering the same message.
The Economist can be something of a contrarian indicator, but this article contains some useful math. It’s paywalled, but:
Markets always find equilibrium — the question is only at what level. Optimists draw comfort from 2022, when most Western countries stopped buying oil from Russia after it invaded Ukraine: oil peaked then at $129 without triggering a global recession. But just 3m barrels a day (b/d) of Russian oil — 3% of world supply — were involved, and most of that was rerouted to Asia. Every day Hormuz stays closed, nearly five times that volume is completely removed from global supply. Even if the strait were to reopen tomorrow, some 3% of the world’s annual output has probably already been forfeited, given inevitable delays getting export volumes back to normal. A deficit of that magnitude cannot be papered over for long. The world is just weeks away from a severe reckoning. . . .
America itself is not immune. . . . The east coast, America’s most populous region, has little refining capacity of its own and depends on piped flows from refineries on the Gulf of Mexico and imports from Europe. The west coast, which is not connected to the Gulf by pipeline, relies in part on imports from Asia and the Middle East. In a crunch, the middle of the country may fare better than the edges.
The U.S. has not built a major new refinery since the 1970s, with environmental regulations and, relatedly, the prospect of long fights over permitting, helping explain why. Constructing a significantly sized new refinery would cost billions, take a very long time, and would not generate a positive return for years. Under the circumstances, the possibility, at some point, of another climatist government back in charge in Washington is not an encouragement to go ahead. Existing legislation shapes corporate spending, but so does the fear of what prospective legislation might bring.
Americans have already seen, whether at the gas pump or elsewhere, that they are not immune from the oil squeeze, despite the scale of our domestic production. The Economist quotes one trader as predicting an average price at the pumps nationwide of around $5 or more (it’s around $4.45 now), unhelpful just as the summer driving season is about to begin, and unhelpful for the Republicans with midterms coming closer.
Iran’s military is warning that it will strike U.S. forces if they attempt to approach the Strait of Hormuz, after President Donald Trump said the United States would soon begin guiding ships through the strait, calling it a humanitarian gesture requested by other countries whose vessels, crews and supplies have been stuck for weeks.
Stock futures were hit early this morning by (probably?) false Iranian reports of an Iranian attack on a U.S. warship. Iranian propaganda is to be expected. The question is the degree to which it will influence the plans of those contemplating sending tankers through the Strait of Hormuz.
My guess is that reports of a coming squeeze are not, as things currently stand, exaggerated. If that’s the case, the willingness of financial markets to look through a crisis will be . . . limited.
Buying the dip is often a good strategy, but that does not mean that “dips” carry no economic, financial, or political costs.