Hormuz Crisis: Oil at the Tipping Point

Current Scenario

Global oil markets remain under acute pressure as geopolitical risks compound an already severe supply shock triggered by the U.S.–Iran war, which began on Feb. 28. Hopes for near-term stabilization briefly improved following a tentative ceasefire announced on April 7, but those expectations have since faded. The U.S. has kept a naval blockade on Iranian ports in place, sustaining disruption across key Middle Eastern export routes and keeping tanker traffic through the Strait of Hormuz well below pre-war levels.

The market is now absorbing what is effectively the largest supply disruption on record, with global oil supply estimated to be 10.8 million barrels a day below baseline. The blockade is widely viewed as leverage to bring Tehran back to the negotiating table. A second round of talks is expected in the coming days; uncertainty and escalation risks remain high.

Markets appear to be pricing in a premature resolution rather than a real recovery in physical flows, leaving a clear gap between paper and spot prices. While a ~400 million-barrel SPR release initially cushioned the shock, it has been offset by ~550 million barrels (11 mb/d over ~50 days) of cumulative supply losses. The balance ~150 million barrels has been showing up in the form of onshore inventory drawdowns.

With Gulf production unlikely to return before end-June, supply remains structurally constrained. As buffers are depleted and spare capacity is minimal, oil prices are likely to stay elevated, with further upside risk as tight physical conditions persist.

Shrinking Inventories Drive Oil Higher

Oil prices are currently being driven by scenario-based expectations around the recovery of flows through the Strait of Hormuz. Oil is expected to trade within a wide $70 to $150+ range, depending on the extent and duration of disruption.

The following scenarios assess probable Crude oil price ranges over the next 1–3 months, contingent on the trajectory of Strait of Hormuz shipping flows following a ceasefire agreement. Each scenario reflects a distinct supply-side outcome and associated market risk premium.

Escalation as a Direct Upside Trigger

In the event of further geopolitical escalation, oil prices are likely to move sharply higher as the market transitions from an already tight balance into an acute supply shock. With an existing deficit of approximately 11–13 mb/d, including 1.6–2 mb/d Iranian oil, the system is operating with minimal flexibility, leaving it highly vulnerable to any incremental disruption.

Further escalation, through Hormuz disruptions, tighter Iranian export constraints, or broader regional spillovers, would materially widen the supply deficit and exacerbate market imbalance.

The ongoing US naval blockade itself introduces an additional layer of structural risk. While the blockade is intended to pressure Iran into concessions, compliance remains unlikely, as doing so would imply significant economic losses, estimated at roughly $150–160 million per day in lost oil export revenues, based on ~1.6 mb/d of exports priced at ~$95–100 per barrel. Although Iran retains some flexibility through alternative non-oil exports and limited crude already at sea, the risk of expanded US enforcement, including potential global interception of Iranian vessels, raises the probability of a prolonged and more severe supply disruption.

At the same time, with spare capacity nearly exhausted and global inventories already drawing down, the oil market lacks the buffers required to absorb further shocks. This implies that any incremental disruption would translate almost directly into price.

As a result, escalation acts as a clear and immediate catalyst for higher oil prices, triggering:

• Sharper backwardation in futures markets
• Further widening of physical premiums
• Accelerated repricing across benchmarks

In this context, oil becomes highly sensitive to marginal changes in supply, and escalation could drive a nonlinear price spike, potentially pushing the market more rapidly toward demand-destruction levels.

Post-De-Escalation Dynamics: A Market Still in Deficit

Even in the event of geopolitical de-escalation, oil markets are likely to remain structurally tight with significant upside risk, as the underlying supply-demand imbalance persists.

The closure of the Strait of Hormuz initially removed approximately 18.4 mb/d of crude flows, of which only 7.3 mb/d has been offset through emergency measures, leaving a net shortfall of 11.1 mb/d. Additionally, after accounting for Iranian output that is stuck due to the US naval blockade, there is a 13 mb/d structural supply shock.

Even with a ceasefire, shut-in production cannot return immediately, with restart timelines extending to end-June or beyond, keeping the market undersupplied.

At the same time, global buffers have largely been exhausted, with a 400 million-barrel global SPR release only delaying the adjustment by 2–3 weeks, and both floating storage and onshore inventories now entering sustained drawdowns. Crucially, the disruption has not only reduced supply but also fragmented global flows, creating a shortage of deliverable crude outside the Gulf, even as stranded barrels remain inaccessible within the region.

This has already begun to manifest in tightening refining margins and product markets, particularly in Asia, where a refined product crisis is expected within weeks.

Importantly, financial markets continue to lag these physical dynamics, with crude benchmarks still pricing in partial normalisation despite a $30+/bbl premium in physical markets and confirmed export losses of ~9 mb/d.

As inventory draws become more visible, particularly as US commercial crude stocks approach the 400-million-barrel Cushing operational floor, the market is likely to reprice rapidly. As of 10 April 2026, US commercial crude inventories were reported at 463.8 million barrels by the EIA. Provided that the Strait of Hormuz flows do not return to normal, and physical inventory drawdowns continue, US commercial crude storage will be below ~400 million barrels and approaching the operational minimum of 370 to 380 million barrels by the end of July. This includes an estimated SPR release total of 139 million barrels.

The cumulative storage lost due to the closure is already ~1 billion barrels. This increases to 1.2 billion barrels by the end of April, 1.59 billion barrels by the end of May, and 1.98 billion barrels by the end of June.

There is not enough commercially available crude for that much supply loss. In this context, even with easing geopolitical tensions, the persistence of a large supply deficit, depleted buffers, and delayed supply recovery creates conditions for oil prices to remain elevated and potentially break higher as the market transitions from perceived surplus to confirmed scarcity.

Forward Outlook – Key Takeaways

• Imbalance worsens into end-April: Ongoing disruptions → accelerating inventory drawdowns
• Critical trigger approaching: US crude stocks falling from ~463.8 mb → ~400 mb Cushing floor → rapid market repricing
• Severe supply erosion: ~1 bn barrels already lost, rising toward ~2 bn by June → insufficient commercial supply
• Asia tightening sharply: By early May, only Japan & China hold excess stocks → rest of Asia forced to scramble
• Refinery behaviour shifts: Potential for price-insensitive buying to avoid shutdowns
• SPR = delay, not solution: Additional releases may smooth timing, but do not fix the deficit
• Bottom line: Oil remains structurally tight with strong upside risk, as markets shift from perceived surplus → confirmed scarcity