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Friday, April 10, 2026

The Great Hormuz Oil Shock

By Century Financial in 'Investment Insights'

The Great Hormuz Oil Shock
Great Hormuz Oil Shock

— BACKGROUND

A Region That Powers the World

Oil Markets are facing an unprecedented fundamental disruption in supply, which is significantly impacting global energy costs. The US and Israel launched a military action against Iran on the 28th of February 2026, and Iran retaliated by targeting US bases in neighbouring Gulf countries, along with a closure of the Strait of Hormuz, leading to a critical choke point for global logistics. The market reacted instantly, with WTI crude oil prices surging about 77.5% from around $67 to $119 in just 6 days. Brent has risen to a new normal above the $100 mark, with oil market volatility at a peak. Brent recently traded in a band of about $36, the widest range on record since Russia invaded Ukraine in 2022.

The Middle East region accounts for about 30% of global oil production, according to the IEA. Estimates from the GCC countries come up to about 23-24% of total global crude oil production. These countries also hold about 511.9 billion barrels as reserves, accounting for about 32.6% of total global crude oil reserves. Along with that, the region accounts for about 20-22% of the world’s LNG exports, with countries like Qatar alone responsible for about 20%. These kinds of figures underscore the region’s influence on global energy supplies.

The current geopolitical conflict in the region and the temporary closure of the Strait of Hormuz are significantly disrupting these crude oil and LNG flows. Rapidly replacing these crude and LNG supplies with alternatives such as Russian oil and gas would be challenging, as existing infrastructure and refineries may not be configured to handle different crude grades.

20%

of global crude and LNG flows through Strait of Hormuz daily

85–90%

of that crude and LNG is destined for Asian markets like China, Taiwan and India

— MARKET POSITIONING

Traders Unwind Bearish Bets

Non-commercial net long positions in Nymex WTI crude futures continue to climb, reaching 172,150 contracts for the week ended March 6 from 64,591 during the week of Jan. 2, CFTC data show. WTI prices have skyrocketed 166.5% during that time span. The rebound suggests traders are unwinding bearish bets amid supply disruptions in the Strait of Hormuz, heightening market anxiety.

The surge in oil futures positions in recent weeks indicates bearish positioning may have peaked at lower price levels. WTI could reach as much as $133 a barrel in the near term as suspended tanker trac through the Strait of Hormuz constrains global crude flows

— SUPPLY OUTLOOK

Largest Supply Disruption in History

The International Energy Agency (IEA) calls this the largest supply disruption in the history of the global oil market. The tanker flows through the chokepoint are down by more than 90%.

The IEA estimates the disruption could cut global supply by about 8 million bpd in March to 98.8 million barrels per day. This will be the lowest level since the first quarter of 2022. The market price action reflects that this news outweighs the recent plan by 32-member countries to release around 400 million barrels from reserves, including 172 million barrels from the US. The agency cut its 2026 supply growth outlook by about 45% to roughly 1.1 million barrels per day, with the entire increase coming from non-OPEC+ producers. The US Energy Information Administration also reduced its 2026 supply-growth forecast to 730,000 barrels per day, down 53% from last month.

— LOGISTICS & ALTERNATIVES

Bypass Routes Fall Short

The Strait of Hormuz, which normally carries about 20 million bpd of crude and petroleum products, has been severely disrupted amid the Iran conflict. Before the disruption, Saudi Arabia exported about 6 million bpd through the strait, while a large share of the UAE’s 3.4–3.7 million bpd production also relied on this route. To mitigate the impact, Saudi Arabia has been rerouting up to 5 million bpd through its East-West pipeline, while the UAE’s Habshan–Fujairah pipeline moves about 1.8 million bpd, enabling roughly 6.8 million bpd to avoid Hormuz. Meanwhile, Iran continues to export roughly 1.1–1.5 million bpd through the Strait of Hormuz. Despite this redirection, the combined ~6.8 million bpd bypass capacity remains far below the ~20 million bpd normally transiting Hormuz, leaving global markets still facing a major supply gap.

ROUTE OPERATOR CAPACITY (MILLION BPD)
East-West Pipeline Saudi Arabia ~5 million bpd
Habshan–Fujairah Pipeline UAE ~1.8 million bpd
Iran via Hormuz Iran 1.1 – 1.5 million bpd
Total Bypass Capacity — ~6.8 million bpd
 
⚠ POTENTIAL RISK

Part of the 5 million bpd being currently moved via Saudi Arabia’s East-West pipeline still faces geopolitical risk, as tankers heading to Asian markets must pass through the Bab-el-Mandeb strait, where any potential escalation involving Yemeni Houthi attacks could disrupt tanker routes, while the Suez Canal mainly serves flows toward Europe rather than Asia.

Risks and Assumptions related to Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
The back-tested strategy might be at risk of data dredging, which is the behavior of testing multiple hypotheses at one time, resulting in picking the data that best supports your main hypothesis.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.
A trading strategy that performs well on multiple datasets from one market (e.g., forex) might not perform as well in another market (e.g., stocks).
The strategy may not depict accuracy in terms of spread changes due to the spread-widening events.

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