The markets are definitely underestimating the impact of the Strait of Hormuz closure. I've heard a couple of different theories why, but the best one seems to be that too many traders were burned by overestimating the impact of COVID on the markets, and so now they're overcompensating by underestimating the impact of the energy sector's worst nightmare. And I don't think the markets are going to properly react to the situation until everything goes absolutely haywire.
The closure of the strait has cut off 10-20% of global crude oil supply. We're at the point in the shutdown where all of the transit before the closure has arrived, which means the effect of the supply shock is now that refineries are draining all of their inventories. That means that 10-20% of demand for refined petroleum products will have to pretty sharpish be destroyed. And while people are definitely prepared to understand the impact on things like gasoline for cars or jet fuel for planes, the reality will also include scenarios like "sorry, can't buy milk anymore because no more plastic for milk jugs." COVID-induced supply shortages broke many people; the coming oil-starved supply shortages are probably going to be at least as bad.
And the real kicker is that, even if you wave a magic wand and reopened the Strait of Hormuz tomorrow, mothballed wells and refineries will take many months to spin back up to full production, just from mothballing. And some of them have been struck as military targets, which will take years to get back to full capacity. I think around 10% of world total LNG capacity is offline until 2027 if not 2028 for that reason alone.
About 20% of the crude oil and natural gas used to come via the Strait of Hormuz. That's out now, and some oil drills will need to be shut down, and it will take 3 months to 2 years to restart them.
But about half of that could be redirected via some pipelines in Saudi Arabia and the UAE.
So, only about 10% of the oil supply is missing.
But was the entire supply in the rest of the world completely without any slack? Everything was running at capacity, with zero capacity to increase deliveries? I doubt that. Let's split the 10% supply reduction into 5% that the rest of the world can provide, incentivized by the higher prices, and 5% demand destruction, incentivized by the same higher prices.
The rule of thumb in the oil markets is that a 1% reduction in supply results in a 10% increase in price. So a 5% reduction in supply should result in a 50% increase in price. We are there, actually a bit higher. Brent was trading at about $65 until February 2026, and now it's at $120. That's more than 80% higher. All these numbers have high uncertainly bars, of course, but so far it looks to me that the market is not reacting in a patently irrational way to the events.
> About 20% of the crude oil and natural gas used to come via the Strait of Hormuz.
20% of the world's oil production. But only half is sold on the international market, the rest is used domestically. So roughly 40% of the world's purchasable oil comes through the Strait.
And now we're much less reliant on oil, and more countries produce it and have reserves. The flip side is the economy and financial system already felt creaky anyway (tariffs, inflation, job market, government shutdowns, private credit, AI, etc.), so net net things may be just as bad or worse.
Even 10% is a massive number. Most oil demand is fairly inelastic. You have to get to work no matter the price of gasoline. You might turn your furnastat down a degree, but that's about it. Groceries need to get delivered no matter the price of diesel. Farmers need to fill their tractors no matter the cost. Plastic and industrial demand is fairly inelastic. The price doesn't need to go up by much to reduce demand by 1%. But to reduce demand by 10% involves massive price increases. Only a fraction of gasoline demand is truly elastic. So that 10% reduction in supply might require halving the elastic demand for oil.
Yes but the point was that supply is very elastic since what happens to old fields is that they get priced out. When an oilfield gets older it's production cost creeps up, slowly. Since most of the oilfields that can produce at $current_price + 5$ aren't even properly shutdown yet, they can be rapidly brought online if prices rise, and there's a large supply of such fields. A very large supply of them.
Nobody's going without oil, it's just pushing up inflation. Not saying that's not a problem, but the problem isn't that people are being forced to go without.
Of course EU countries are complaining to high heaven since increased inflation will push their borrowing cost up further, and given the state of their public finances this means more sacrifices. If I lived in Paris, I'd park my car indoors for a month or two. Or 100km outside of Paris.
> But was the entire supply in the rest of the world completely without any slack? Everything was running at capacity, with zero capacity to increase deliveries?
I'm trying to find some numbers here and failing utterly (thanks AI for utterly ruining search). But my recollection from when I've seen it discussed in the past is that the vast majority of slack oil production is in the OPEC countries--essentially everybody not in OPEC produces every drop they can--and even of that, the really big source of slack is Saudi Arabia. You know, all of the places that are currently unable to ship any oil because of the closure of the Strait of Hormuz.
aiui most plastics in the US for this comes from the ethylene byproducts of natural gas/fracking.
Although it would be unironically fantastic if we could hard wean ourselves off plastics and go back to reusable glass jugs. If I could bring my growler to Kroger for milk and cream I'd be a happy camper
The cruel irony here is that this really won't affect the US at all. Europe and Asia will feel the brunt of it, and they seem completely uninterested in working toward a solution.
Why wouldn’t that affect the US? Isn’t the price of oil global? It’s not like US oil will be sold for cheaper to the local population, if that would be the case the incentive would be to export at the higher price instead, no?
If you look at gas prices in Saudi Arabia, some of it is subsidised to be lower but clearly its much cheaper to be consuming your own energy vs purchasing it internationally for a variety of reasons. The size of the effect is a messy economics question, not a black and white thing.
Weird that this was flagged dead in 2 hours? HN is really on a propaganda narrative shaping kick with the flagged dead.
ramesh31 2 hours ago [dead] | root | parent | prev | next [–]
>"Why wouldn’t that affect the US? Isn’t the price of oil global? It’s not like US oil will be sold for cheaper to the local population, if that would be the case the incentive would be to export at the higher price instead, no?"
Sure, oil is a global commodity, but "global price" doesn't mean uniform impact. The US has been a net petroleum exporter since 2020 and produces ~13M bpd domestically. WTI consistently trades at a discount to Brent, often 10%+. Gulf Coast refineries are configured for the heavy/sour crude we get from Canada and our own shale, not the Gulf-state light/sweet that's at risk here. We also produce all of our own natural gas, have some of the lowest domestic prices in the world (Permian gas has literally gone negative in the past due to oversupply), and a huge amount of our energy infrastructure is set up for it (LNG is a whole other category that is far more expensive than regular gas delivery).
Compare that to Europe, which lost its Russian pipeline supply, has minimal domestic production, and is heavily dependent on LNG and Middle East crude routed through exactly the chokepoints in question. Or Japan/South Korea, which import ~90%+ of their oil and a huge chunk transits Hormuz.
Yes, the US sees secondary inflation effects, diesel feeds into everything, jet fuel into airfares, etc. I'm not saying zero impact. But "large scale inflation" comparable to what the EU is about to eat? No. The structural insulation is real, and it's why the US can posture militarily without the same domestic economic gun to its head that Europeans are faced with.
I'm not American. But couldn't this being held due to the mid terms? It already looks bad as is, but if inflation started escalating immediately with the conflict (or more than it is) wouldn't it make it for for electoral purposes?
There's a limit to what we can do. Things were kind of stable before Trump went in bombing everything and I guess we a hoping he'll calm down and things can go on. There isn't an easy military solution to opening the straits it's hard to do diplomatic stuff with Trump issuing some new threat every 24 hours or so.
Everything shut down for 6 months and somehow miraculously the economy just sort of chugged along without much shock until about 2 years later when all the consequences of the COVID aid/stimulus came home to roost.
Which is to say, it's a speculative bubble and it will burst on its own schedule and for essentially arbitrary reasons and not due to the economic fundamentals of the industries involved.
Which... is something we all basically knew even before the Iran boondoggle. The market is as the market does.
The typical investor algorithm is timing the market or analysing stocks doesn't work so keep buying index funds. That can go on and on unless people run out of money to buy with.
decidedly off topic but since i've stumbled across you again, i'm still over here wondering what the hell you meant a couple months ago by arguing that doing bare syscalls on linux from a forth is an emulator.
it was quite perplexing to be called a sovcit who was imagining some software i've written just because it was rhetorically inconvenient for you that said software existed
We're not seeing the true scope of just how bad things and are going to get.
There are ~9 different oil "flavors" traded in large volume in the world. The big factors are primarily API gravity [1] and sulfur content. Low sulfur content is generally better but the sulfur is extracted into necessary products (primarily fertilizer). Likewise, the API gravity favors higher gravity, which actually means lighter crude. So when you see terms like "sweet, light crude" "sweet" means "low sulfur content" and "light" is high gravity. But heavier crude still has applications like building roads.
Oil is traded on futures markets. A futures contract is standardized for the type of oil, standard amounts (typically 1000 barrels per contract) and a delivery date. This allows producers to forward sell oil and consumers to forward buy it, both of which are just hedging price risk.
The price you see publicly is the future price. What isn't public is the spot or physical price. Historically those tracked each other. They have diverged in the last 2 months by upards of $40/barrel [2]. We've seen Dubai oil trade at $180+/barrel physical and Brent is really at more like $140-150.
Nobody in the know or in the business trusts the futures prices anymore.
This can happen in what's called a market of extreme backwardation. That simply means the spot prices are higher than the future price. The market seems to believe the supplies are currently constrainted but the Strait will be reopened in the short term. This is likely overly optimistic.
On a side note we saw extreme market backwardation in the silver market in late 2025 where again the paper (future) price was a lie and refiners were buying at the supposed spot price so different circumstances to this.
The second issue is that there have been record releases from strategic reserves to try and stabilize prices [3]. Even so, stockpiles are dwindling of both crude and refined products like avgas and gasoline.
Lastly, if the Strait opened tomorrow it's likely going to take years for oil to reach pre-war price levels and a lot of the problems over the next year or more are already baked in. A whole bunch of harvests have missed being fertilized so you will likely find that tens of millions of people are going to suffer from famine regardless of what happens now.
A lot of professionals are coming to the realization that financial markets are in denial about how bad this is and are going to be (eg [4]).
Love the analysis. Everything I am seeing says that the energy market is a dead man walking - the catastrophic damage is already done, we are just slow to realize. Refineries and other intermediary processes cannot absorb the disruption, but it is slow to work through the system.
One thing I have been wondering is how much buffer can hold out from the undeniable pain surfacing. The strait used to carry ~20 million barrels a day, say with clever pipeline re-routing, oil from the region is still delivering 10mbpd. We are two months in, so that is some 600 million barrel deficit. Global reserves (minus China) were thought to be 1.2 billion barrels before this started.
With reserves cut in half, I am stupefied at how calm the markets are taking this.
There are too many moving parts to predict this with any accuracy such as:
1. What happens with interest rates? Powell's replacement will be Kevin Warsh who has seemingly promised to lower interest rates in a short-term ploy aimed at the midterms. Should this happen, it'll likely be a disaster for inflation and the dollar;
2. How and when this impasse ends? Ending tomorrow is still singificantly better than ending in September. Also, there could be a comprehensive deal or Trump could simply walk away and declare victory, essentially leaving the situation unresolved but basically allowing Iran to charge a toll;
3. How bad will inflation get? I think I heard that in 2008 households still saved on average 10% of their income. That's basically 0% now. There simply is no buffer;
4. Does the AI market crash? That could happen but I'm not betting it will. Lookk at how long the market has remained irrational about TSLA;
5. How bad is the energy crunch going to get in Asia and Europe in particular? Unlike 1973, the US might get expensive gas but as a net energy exporter now, there won't be no gas like there was then. Asia and Europe (particularly for heating come winter) are in a different category;
6. What regimes are going to fall from all of this? I don't know what that number will be but I suspect it won't be zero;
7. What political realignments will take place because the US security guarantees (particularly for the GCC) and guarantees of maritime trade (since WW2) have been broken; and
8. How bad are the food shortages going to be? Developing countries will bear the brunt of this of course.
Probably researched by an investigative journalist and then buried by the owners of the NYT or the WaPo because they like Trump and want to help him (help them) get rich(er).
Looks like many could be siloed this summer given the increase in fuel prices across the board. That could also be a downward drag on many industries. Even if we were able to get back to where we were 2 months ago today, there would still be noticeable, non-zero impact.
My guess is the stark difference in type of cars, number of cars, typical miles driven, and public transport. A standard american's road trip vacation would be unusual in europe. For example, my relative visits family several times a year, doing 4 hour drive in a large pickup truck for a short weekend trip. In europe, my understanding is that destinations are likely to be closer, cars are smaller, and trains are common (maybe the default?).
That's just the futures price. If you wanted to buy it, you would be paying $140 plus.There is a growing divergence between futures pricing and actual real world price.
The actual real world price for immediate delivery is called the spot price. The price of the future is just the price for a contract to have it delivered on a certain date.
As I understand it, Oil Futures come in two varieties, one kind result in you actually taking the oil when they happen, which is why that negative price craziness years back because if you're holding the futures and haven't got anywhere to put that oil that's a problem for you. The other kind though is some sort of cash equivalent, I guess maybe it resolves to the current spot price or something at the moment it stops being a future ?
So, for these mispriced Futures, what happens? If I buy $1M of Brent Crude futures and then just wait, and when my futures resolve that much Brent Crude would be worth $1.5M at spot prices do I... get $1.5M and somebody in the oil industry just lost their shirt? Do they just ship me enough Brent Crude to sell it for $1.5M at spot prices? What if they were lying and they can't deliver ?
Yes, there are physically settled and cash settled futures. The futures price converges to the settlement price (tied to spot) as the expiration date approaches.
Futures are marked to market every day and gains and losses are paid out daily in cash. So in the example you gave, you would have received $500K profit between when you bought the futures at $1M and when they expire at $1.5M. For cash settled futures that's the end of the story - a final small adjustment happens, in cash, your position disappears, and that's it.
For physically settled futures, the story is the same, but on the day of delivery, you (as the buyer) would be required to pay $1.5M cash to receive the oil, and whoever held the other side of the contract (as the seller) would be required to deliver it to you at some named location, typically a storage facility.
Who loses the $500K? The seller (who was short the contract) has been paying the losses daily as the price moved against them. The payments are handled through the exchange/clearinghouse and their brokerage.
What if they can't deliver? The exchange steps in and provides guarantees.
If I bought $1M of Brent Crude Futures settled by delivery so I can make fuel for cars and you "step in and provide guarantees" rather than delivering I cannot refine "guarantees" into fuel for cars.
Ordinarily I'm sure such "guarantees" are enough, maybe for 10% above spot price we can get enough oil to my refinery to make that fuel and the exchange is able to cover this cost from their operating budget. But when the deliveries don't even resemble sold futures that stops working, that oil isn't available at any price and so those "guarantees" become worthless.
This is the other end of the problem the ETFs had last time. The ETFs couldn't go negative because an ETF is just paper so if my ETF had a notionally negative value I don't pay I just tear up the ETF instead whereas the notionally negative value of an oil delivery was like yeah, this is nasty toxic black sludge, you're going to need to put that somewhere.
The other end is that ETFs aren't actually oil, if I have an ETF but I need diesel that's not a thing you can make from the ETF. Even if my ETF tracked the price perfectly, I still don't have diesel, I need to find somebody who wants to sell the diesel and maybe if supplies are tight that's not one of the options.
I know your comment was a pun, but I'd rather not miss an opportunity to tell someone on the internet that the US isn't the invincible superpower it thinks it is.
The Netherlands dodged the 1970s oil embargo because of Shell and their relationship with apartheid South Africa and apparently we're the only country in Europe that has refineries that produces kerosene. Evil always wins.
The markets are definitely underestimating the impact of the Strait of Hormuz closure. I've heard a couple of different theories why, but the best one seems to be that too many traders were burned by overestimating the impact of COVID on the markets, and so now they're overcompensating by underestimating the impact of the energy sector's worst nightmare. And I don't think the markets are going to properly react to the situation until everything goes absolutely haywire.
The closure of the strait has cut off 10-20% of global crude oil supply. We're at the point in the shutdown where all of the transit before the closure has arrived, which means the effect of the supply shock is now that refineries are draining all of their inventories. That means that 10-20% of demand for refined petroleum products will have to pretty sharpish be destroyed. And while people are definitely prepared to understand the impact on things like gasoline for cars or jet fuel for planes, the reality will also include scenarios like "sorry, can't buy milk anymore because no more plastic for milk jugs." COVID-induced supply shortages broke many people; the coming oil-starved supply shortages are probably going to be at least as bad.
And the real kicker is that, even if you wave a magic wand and reopened the Strait of Hormuz tomorrow, mothballed wells and refineries will take many months to spin back up to full production, just from mothballing. And some of them have been struck as military targets, which will take years to get back to full capacity. I think around 10% of world total LNG capacity is offline until 2027 if not 2028 for that reason alone.
I don't think so.
About 20% of the crude oil and natural gas used to come via the Strait of Hormuz. That's out now, and some oil drills will need to be shut down, and it will take 3 months to 2 years to restart them.
But about half of that could be redirected via some pipelines in Saudi Arabia and the UAE.
So, only about 10% of the oil supply is missing.
But was the entire supply in the rest of the world completely without any slack? Everything was running at capacity, with zero capacity to increase deliveries? I doubt that. Let's split the 10% supply reduction into 5% that the rest of the world can provide, incentivized by the higher prices, and 5% demand destruction, incentivized by the same higher prices.
The rule of thumb in the oil markets is that a 1% reduction in supply results in a 10% increase in price. So a 5% reduction in supply should result in a 50% increase in price. We are there, actually a bit higher. Brent was trading at about $65 until February 2026, and now it's at $120. That's more than 80% higher. All these numbers have high uncertainly bars, of course, but so far it looks to me that the market is not reacting in a patently irrational way to the events.
> About 20% of the crude oil and natural gas used to come via the Strait of Hormuz.
20% of the world's oil production. But only half is sold on the international market, the rest is used domestically. So roughly 40% of the world's purchasable oil comes through the Strait.
The 1970s oil crisis was only losing 5-7% of total production. We are most likely double that amount right now.
And now we're much less reliant on oil, and more countries produce it and have reserves. The flip side is the economy and financial system already felt creaky anyway (tariffs, inflation, job market, government shutdowns, private credit, AI, etc.), so net net things may be just as bad or worse.
Even 10% is a massive number. Most oil demand is fairly inelastic. You have to get to work no matter the price of gasoline. You might turn your furnastat down a degree, but that's about it. Groceries need to get delivered no matter the price of diesel. Farmers need to fill their tractors no matter the cost. Plastic and industrial demand is fairly inelastic. The price doesn't need to go up by much to reduce demand by 1%. But to reduce demand by 10% involves massive price increases. Only a fraction of gasoline demand is truly elastic. So that 10% reduction in supply might require halving the elastic demand for oil.
Yes but the point was that supply is very elastic since what happens to old fields is that they get priced out. When an oilfield gets older it's production cost creeps up, slowly. Since most of the oilfields that can produce at $current_price + 5$ aren't even properly shutdown yet, they can be rapidly brought online if prices rise, and there's a large supply of such fields. A very large supply of them.
Nobody's going without oil, it's just pushing up inflation. Not saying that's not a problem, but the problem isn't that people are being forced to go without.
Of course EU countries are complaining to high heaven since increased inflation will push their borrowing cost up further, and given the state of their public finances this means more sacrifices. If I lived in Paris, I'd park my car indoors for a month or two. Or 100km outside of Paris.
That's basically only true in OPEC countries, and OPEC countries are generally affected by the Hormuz closure.
Outside of OPEC marginal production is basically tar sands and fracking, which cannot be ramped up quickly.
> But was the entire supply in the rest of the world completely without any slack? Everything was running at capacity, with zero capacity to increase deliveries?
I'm trying to find some numbers here and failing utterly (thanks AI for utterly ruining search). But my recollection from when I've seen it discussed in the past is that the vast majority of slack oil production is in the OPEC countries--essentially everybody not in OPEC produces every drop they can--and even of that, the really big source of slack is Saudi Arabia. You know, all of the places that are currently unable to ship any oil because of the closure of the Strait of Hormuz.
I’m going to bookmark this and check back periodically this year to see if I am truly not able to buy milk due to plastic. Interesting prediction.
I don't think that was a specific prediction, but rather an illustration of the type of impact oil shortages could have.
I'm curious if people have more specific predictions about what products/services will be affected more than a layperson would expect.
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> no more plastic for milk jugs
aiui most plastics in the US for this comes from the ethylene byproducts of natural gas/fracking.
Although it would be unironically fantastic if we could hard wean ourselves off plastics and go back to reusable glass jugs. If I could bring my growler to Kroger for milk and cream I'd be a happy camper
FWIW in Germany and Switzerland milk is mostly sold in carton packaging. I never understood why the US stuck to using plastic jugs
Because it's cheap
*For the rest of the world.
The cruel irony here is that this really won't affect the US at all. Europe and Asia will feel the brunt of it, and they seem completely uninterested in working toward a solution.
Why wouldn’t that affect the US? Isn’t the price of oil global? It’s not like US oil will be sold for cheaper to the local population, if that would be the case the incentive would be to export at the higher price instead, no?
If you look at gas prices in Saudi Arabia, some of it is subsidised to be lower but clearly its much cheaper to be consuming your own energy vs purchasing it internationally for a variety of reasons. The size of the effect is a messy economics question, not a black and white thing.
Weird that this was flagged dead in 2 hours? HN is really on a propaganda narrative shaping kick with the flagged dead.
ramesh31 2 hours ago [dead] | root | parent | prev | next [–]
>"Why wouldn’t that affect the US? Isn’t the price of oil global? It’s not like US oil will be sold for cheaper to the local population, if that would be the case the incentive would be to export at the higher price instead, no?" Sure, oil is a global commodity, but "global price" doesn't mean uniform impact. The US has been a net petroleum exporter since 2020 and produces ~13M bpd domestically. WTI consistently trades at a discount to Brent, often 10%+. Gulf Coast refineries are configured for the heavy/sour crude we get from Canada and our own shale, not the Gulf-state light/sweet that's at risk here. We also produce all of our own natural gas, have some of the lowest domestic prices in the world (Permian gas has literally gone negative in the past due to oversupply), and a huge amount of our energy infrastructure is set up for it (LNG is a whole other category that is far more expensive than regular gas delivery).
Compare that to Europe, which lost its Russian pipeline supply, has minimal domestic production, and is heavily dependent on LNG and Middle East crude routed through exactly the chokepoints in question. Or Japan/South Korea, which import ~90%+ of their oil and a huge chunk transits Hormuz.
Yes, the US sees secondary inflation effects, diesel feeds into everything, jet fuel into airfares, etc. I'm not saying zero impact. But "large scale inflation" comparable to what the EU is about to eat? No. The structural insulation is real, and it's why the US can posture militarily without the same domestic economic gun to its head that Europeans are faced with.
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Not true at all. USA will see large scale inflation. Oil and derivatives are basically the central global commodities.
I'm not American. But couldn't this being held due to the mid terms? It already looks bad as is, but if inflation started escalating immediately with the conflict (or more than it is) wouldn't it make it for for electoral purposes?
The party in charge initiated this and inflation / bad economy aren’t usually winning electoral strategies.
There's a limit to what we can do. Things were kind of stable before Trump went in bombing everything and I guess we a hoping he'll calm down and things can go on. There isn't an easy military solution to opening the straits it's hard to do diplomatic stuff with Trump issuing some new threat every 24 hours or so.
price shocks don't cause inflation, printing money does.
When you google "whistling past the graveyard" you get a screenshot of the stock market performance for the past month.
Y'all remember COVID?
Everything shut down for 6 months and somehow miraculously the economy just sort of chugged along without much shock until about 2 years later when all the consequences of the COVID aid/stimulus came home to roost.
That is exactly how this will play out.
This is going to work until all of the sudden it doesn't.
Which is to say, it's a speculative bubble and it will burst on its own schedule and for essentially arbitrary reasons and not due to the economic fundamentals of the industries involved.
Which... is something we all basically knew even before the Iran boondoggle. The market is as the market does.
> … for essentially arbitrary reasons and not due to the economic fundamentals …
When I think about the impact of the war on Iran, it’s pretty clearly affecting “economic fundamentals”. So what are you talking about?
They're saying that SPY is up 12% over the past month despite the Iran war. The stock market is not the economy.
The typical investor algorithm is timing the market or analysing stocks doesn't work so keep buying index funds. That can go on and on unless people run out of money to buy with.
decidedly off topic but since i've stumbled across you again, i'm still over here wondering what the hell you meant a couple months ago by arguing that doing bare syscalls on linux from a forth is an emulator.
it was quite perplexing to be called a sovcit who was imagining some software i've written just because it was rhetorically inconvenient for you that said software existed
"This time it's different"
Starting to spike in certain states as well: https://www.freep.com/story/news/local/michigan/2026/04/13/m...
We're not seeing the true scope of just how bad things and are going to get.
There are ~9 different oil "flavors" traded in large volume in the world. The big factors are primarily API gravity [1] and sulfur content. Low sulfur content is generally better but the sulfur is extracted into necessary products (primarily fertilizer). Likewise, the API gravity favors higher gravity, which actually means lighter crude. So when you see terms like "sweet, light crude" "sweet" means "low sulfur content" and "light" is high gravity. But heavier crude still has applications like building roads.
Oil is traded on futures markets. A futures contract is standardized for the type of oil, standard amounts (typically 1000 barrels per contract) and a delivery date. This allows producers to forward sell oil and consumers to forward buy it, both of which are just hedging price risk.
The price you see publicly is the future price. What isn't public is the spot or physical price. Historically those tracked each other. They have diverged in the last 2 months by upards of $40/barrel [2]. We've seen Dubai oil trade at $180+/barrel physical and Brent is really at more like $140-150.
Nobody in the know or in the business trusts the futures prices anymore.
This can happen in what's called a market of extreme backwardation. That simply means the spot prices are higher than the future price. The market seems to believe the supplies are currently constrainted but the Strait will be reopened in the short term. This is likely overly optimistic.
On a side note we saw extreme market backwardation in the silver market in late 2025 where again the paper (future) price was a lie and refiners were buying at the supposed spot price so different circumstances to this.
The second issue is that there have been record releases from strategic reserves to try and stabilize prices [3]. Even so, stockpiles are dwindling of both crude and refined products like avgas and gasoline.
Lastly, if the Strait opened tomorrow it's likely going to take years for oil to reach pre-war price levels and a lot of the problems over the next year or more are already baked in. A whole bunch of harvests have missed being fertilized so you will likely find that tens of millions of people are going to suffer from famine regardless of what happens now.
A lot of professionals are coming to the realization that financial markets are in denial about how bad this is and are going to be (eg [4]).
[1]: https://en.wikipedia.org/wiki/API_gravity
[2]: https://www.csis.org/analysis/how-interpret-wartime-oil-pric...
[3]: https://www.iea.org/news/iea-member-countries-to-carry-out-l...
[4]: https://oilprice.com/Energy/Energy-General/Is-Reality-Finall...
Love the analysis. Everything I am seeing says that the energy market is a dead man walking - the catastrophic damage is already done, we are just slow to realize. Refineries and other intermediary processes cannot absorb the disruption, but it is slow to work through the system.
One thing I have been wondering is how much buffer can hold out from the undeniable pain surfacing. The strait used to carry ~20 million barrels a day, say with clever pipeline re-routing, oil from the region is still delivering 10mbpd. We are two months in, so that is some 600 million barrel deficit. Global reserves (minus China) were thought to be 1.2 billion barrels before this started.
With reserves cut in half, I am stupefied at how calm the markets are taking this.
Spot on (pun intended). This guy knows the oil markets.
What's your take on the probability of a recession given the oil price shock and currently high interest rates? Historical parallels do not look good.
There are too many moving parts to predict this with any accuracy such as:
1. What happens with interest rates? Powell's replacement will be Kevin Warsh who has seemingly promised to lower interest rates in a short-term ploy aimed at the midterms. Should this happen, it'll likely be a disaster for inflation and the dollar;
2. How and when this impasse ends? Ending tomorrow is still singificantly better than ending in September. Also, there could be a comprehensive deal or Trump could simply walk away and declare victory, essentially leaving the situation unresolved but basically allowing Iran to charge a toll;
3. How bad will inflation get? I think I heard that in 2008 households still saved on average 10% of their income. That's basically 0% now. There simply is no buffer;
4. Does the AI market crash? That could happen but I'm not betting it will. Lookk at how long the market has remained irrational about TSLA;
5. How bad is the energy crunch going to get in Asia and Europe in particular? Unlike 1973, the US might get expensive gas but as a net energy exporter now, there won't be no gas like there was then. Asia and Europe (particularly for heating come winter) are in a different category;
6. What regimes are going to fall from all of this? I don't know what that number will be but I suspect it won't be zero;
7. What political realignments will take place because the US security guarantees (particularly for the GCC) and guarantees of maritime trade (since WW2) have been broken; and
8. How bad are the food shortages going to be? Developing countries will bear the brunt of this of course.
I wish I knew.
So where's the analysis of how much money the Trump family made off this?
Probably researched by an investigative journalist and then buried by the owners of the NYT or the WaPo because they like Trump and want to help him (help them) get rich(er).
California and other western states could see 1970s style rationing and increasing prices within the next few weeks...
Looks like many could be siloed this summer given the increase in fuel prices across the board. That could also be a downward drag on many industries. Even if we were able to get back to where we were 2 months ago today, there would still be noticeable, non-zero impact.
What do you mean by siloed?
Limited in their options. Americans tend to use more gasoline in the summer
https://www.eia.gov/dnav/pet/hist/leafhandler.ashx?n=pet&s=m...
Why? Isn't it the opposite in Europe?
My guess is the stark difference in type of cars, number of cars, typical miles driven, and public transport. A standard american's road trip vacation would be unusual in europe. For example, my relative visits family several times a year, doing 4 hour drive in a large pickup truck for a short weekend trip. In europe, my understanding is that destinations are likely to be closer, cars are smaller, and trains are common (maybe the default?).
Understandable
Not traveling or going on vacation.
This means the economy is up right?
That's just the futures price. If you wanted to buy it, you would be paying $140 plus.There is a growing divergence between futures pricing and actual real world price.
The actual real world price for immediate delivery is called the spot price. The price of the future is just the price for a contract to have it delivered on a certain date.
Spot prices: https://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm
Futures prices: https://oilprice.com/oil-price-charts/
As I understand it, Oil Futures come in two varieties, one kind result in you actually taking the oil when they happen, which is why that negative price craziness years back because if you're holding the futures and haven't got anywhere to put that oil that's a problem for you. The other kind though is some sort of cash equivalent, I guess maybe it resolves to the current spot price or something at the moment it stops being a future ?
So, for these mispriced Futures, what happens? If I buy $1M of Brent Crude futures and then just wait, and when my futures resolve that much Brent Crude would be worth $1.5M at spot prices do I... get $1.5M and somebody in the oil industry just lost their shirt? Do they just ship me enough Brent Crude to sell it for $1.5M at spot prices? What if they were lying and they can't deliver ?
Yes, there are physically settled and cash settled futures. The futures price converges to the settlement price (tied to spot) as the expiration date approaches.
Futures are marked to market every day and gains and losses are paid out daily in cash. So in the example you gave, you would have received $500K profit between when you bought the futures at $1M and when they expire at $1.5M. For cash settled futures that's the end of the story - a final small adjustment happens, in cash, your position disappears, and that's it.
For physically settled futures, the story is the same, but on the day of delivery, you (as the buyer) would be required to pay $1.5M cash to receive the oil, and whoever held the other side of the contract (as the seller) would be required to deliver it to you at some named location, typically a storage facility.
Who loses the $500K? The seller (who was short the contract) has been paying the losses daily as the price moved against them. The payments are handled through the exchange/clearinghouse and their brokerage.
What if they can't deliver? The exchange steps in and provides guarantees.
If I bought $1M of Brent Crude Futures settled by delivery so I can make fuel for cars and you "step in and provide guarantees" rather than delivering I cannot refine "guarantees" into fuel for cars.
Ordinarily I'm sure such "guarantees" are enough, maybe for 10% above spot price we can get enough oil to my refinery to make that fuel and the exchange is able to cover this cost from their operating budget. But when the deliveries don't even resemble sold futures that stops working, that oil isn't available at any price and so those "guarantees" become worthless.
This is the other end of the problem the ETFs had last time. The ETFs couldn't go negative because an ETF is just paper so if my ETF had a notionally negative value I don't pay I just tear up the ETF instead whereas the notionally negative value of an oil delivery was like yeah, this is nasty toxic black sludge, you're going to need to put that somewhere.
The other end is that ETFs aren't actually oil, if I have an ETF but I need diesel that's not a thing you can make from the ETF. Even if my ETF tracked the price perfectly, I still don't have diesel, I need to find somebody who wants to sell the diesel and maybe if supplies are tight that's not one of the options.
I thought spot prices weren’t public
Normal backwardation seems to be about $5 - https://www.mcoscillator.com/learning_center/weekly_chart/cr...
See the spread when Russia attacked Ukraine went up to 100
p.s. TIL contango is opposite of backwardation
And getting even worse for end use commodities
If this is what winning a war looks like I hope we don't ever lose one.
Many are saying the US just did.
You've lost Afghanistan and Vietnam.
I know your comment was a pun, but I'd rather not miss an opportunity to tell someone on the internet that the US isn't the invincible superpower it thinks it is.
The Netherlands dodged the 1970s oil embargo because of Shell and their relationship with apartheid South Africa and apparently we're the only country in Europe that has refineries that produces kerosene. Evil always wins.