The Unprecedented Shift Global Oil Markets
The Hormuz Crisis
Today’s global energy landscape is facing a pivotal question: are oil prices going to come down after the conflict with Iran, or are we witnessing significant structural changes to the oil markets?.
For years, there has always been a theoretical risk that the Straits of Hormuz could be closed, but those threats have now actually been realized. This event has triggered a series of supply dislocations that are spreading across the world, impacting everything from crude oil to specialized petroleum products like jet fuel.
The Strategic Chokepoint: A Mile-Wide Bottleneck
The Strait of Hormuz is a narrow body of water between Saudi Arabia and the UAE on the south and Iran on the north. At its narrowest point, the straight narrows to about 20 km, but the navigable part of the waterway is only about one mile wide in each direction. This means that large crude oil tankers or LNG ships must travel single file with plenty of distance between them.
Any navigational turns or attacks in such a narrow body of water could easily cause ships to run into each other,While the Iranians have attacked about 15 vessels, they have effectively closed the straits not just through military action, but by forcing the cancellation of shipping insurance policies.
Without insurance, ships inside the Persian Gulf are unwilling to transit the straight, and those outside are unwilling to enter. In a normal situation, this traffic way handles 20 to 22 million barrels per day of crude oil and products, alongside 20% of the global LNG supply.
Disruption of Global Refineries and Product Prices
A surprising development in this conflict is that product prices, such as gasoline and diesel, have increased faster than crude prices. This is largely due to the situation in Europe, which was heavily dependent on the Middle East for diesel and jet fuel. When the straits closed, European refineries had to immediately pivot to make less gasoline and more diesel, while also searching for replacement barrels for their starved crude supplies.
In the United States, jet fuel prices have doubled in the last three week. Jet fuel equilibrates quickly across the world because airlines optimize where they fuel their aircraft to avoid high-cost jurisdictions. California is being disproportionately impacted; it receives about 15% of its crude from the Persian Gulf and 100,000 barrels a day of gasoline from India and Korea. As these flows diminish, California has seen price increases of well over a dollar a gallon in just three weeks.
From a Supply Crisis to a Production Crisis
Attempts to bypass the straits via pipelines in Saudi Arabia, the UAE, and Iraq have been made, but these pipelines cannot fully make up the 15 million barrels per day of crude that normally flows through the water. Approximately 8 million barrels a day have already been shut in. Furthermore, there are no pipeline alternatives for refined products or LNG.
The conflict reached a dangerous escalation on March 19th with the attack on the Ras Laffan LNG facility in Qatar. Early assessments suggest damage could take some of these facilities offline for 3 to 5 years. This represents a shift from a "supply crisis" to a "production crisis".
While the straits might eventually reopen, damaged infrastructure must be repaired before tankers can even be reloaded This uncertainty is being priced into the market, with oil prices expected to stay elevated through 2026 and into 2027.
The Long-Term Outlook: Underinvestment and Geology
Even if the conflict ends, the future of oil prices remains under upward pressure. If the current Iranian regime stays in place, the market will likely maintain a higher risk premium of $5 to $10 a barrel because the likelihood of another interruption is now much higher.
Looking toward the 2030s and 2040s, structural issues will dominate. The upstream part of the oil industry has structurally underinvested for about a decade due to narratives surrounding the energy transition and "Net Zero". Because these investments take 5 to 10 years to realize production, the market is expected to get much tighter.
Furthermore, geology just keeps getting tougher. While technology has made incredible innovations, the cost curve is getting steeper as the geology becomes harder to innovate against,
Global Realignments: Venezuela and China
The crisis is also forcing a redirection of global oil flows. Venezuelan heavy oil, which was being sent to China to repay loans, is now being redirected to the US Gulf Coast where refiners are willing to pay market prices. Consequently, China has lost a significant source of discounted crude.
While the US shale revolution helped reduce American dependency on the Persian Gulf, a similar response in other countries like Argentina, China, and Saudi Arabia is still in the early stages or facing regulatory hurdles. Until trust and infrastructure are reestablished in these regions, the global market remains vulnerable to the volatility of the Middle East.
Global Winners, Losers, and Realignments
The crisis has created clear winners and losers. The Middle East producers trapped inside the gulf (Iraq, Kuwait, Iran) are facing brutal economic hits. Conversely, any producer outside the region—including those in the U.S., Brazil, and Guyana—is seeing an immediate windfall as their oil, which sold for $65 in February, now fetches over $100.
This shift is also redrawing the map of global trade:
Venezuela: Previously sending its heavy oil to China to repay loans, Venezuela is now redirecting that oil to the U.S. Gulf Coast, where refiners are willing to pay full market price. This has significantly improved cash flow for Venezuela while depriving China of a source of "discounted" crude.
China: China has been the biggest loser in this realignment. They lost their 10–15 per barrel discount on Venezuelan and Iranian oil. They are now forced to compete in the global market at full price, which acts as a massive tax on their economy.
New Shale Frontiers: While shale has lagged outside the U.S., Argentina is seeing a boom. Other nations like China and Saudi Arabia are aggressively exploring their own massive shale reserves, though they have yet to see commercial-scale results.
