The Strait of Hormuz disruption has created a physical supply deficit that cannot be mitigated. The Strait was carrying around 20 million barrels per day (b/d) at the end of February 2026. Saudi land pipelines can reroute up to 4 million b/d, strategic petroleum reserves (SPRs) can contribute up to 3 million b/d, incremental Russian barrels can add ~ 0.5 million b/d, and perhaps 1 million b/d of Iranian oil continues to be exported. Even accounting for all of these offsets, the market remains in deficit by at least 12 million b/d (compared to a global market of just over 100 million b/d, i.e., more than a 10% deficit).
Regional price dislocation – Brent lagging other oil benchmarks
The headline Brent price understates the tightness in the physical market. In the Middle East, crude blends are trading at $140–$150/bl, while Brent is just over $100/bl. The differential exists because the Atlantic Basin currently has a relatively large volume of oil on the water, and these waterborne supplies are cushioning Brent, but as these Atlantic inventories are drawn down Brent should move up to narrow the gap with Middle Eastern prices.
The pace of this inventory draw-down matters; if inventories continue to decline at around 15 million b/d the Atlantic Basin could see oil on the water fall by approximately 200 million barrels every two weeks. This is likely to be enough to drive spot prices meaningfully higher. Product markets are already reflecting acute tightness, with jet fuel and diesel both trading above $200 per barrel.
The Brent forward curve is in steep backwardation (meaning spot prices are well above futures). This is the market's way of saying the shortage is acute at the moment and should ease, even the longer end of the forward curve has risen (reflecting a view that a geopolitical premium for oil prices will linger).
Demand destruction – the market will balance
As inventories tighten and Brent moves higher, the physical market will rebalance through demand destruction. Brent prices in the $120–$150/bl range are what it takes to prompt meaningful changes in consumer behaviour. We are already seeing early signs: airlines are cutting unprofitable routes, and the IEA has issued guidance encouraging consumers to reduce oil use.
The path to normalisation – it takes two to TACO
A ceasefire timeline is not something we have a particular edge on, but our instinct is that it will take longer than consensus expects. Tehran's negotiating position strengthens every day as global oil inventories fall; meanwhile, factionalism within Iranian leadership adds further uncertainty. While there are reports of dialogue between the two camps, the status of any talks remains unclear. Our expectation is that it will be multiple weeks until a ceasefire is reached, followed by a further three to four weeks to restore normal barrel flows, as fields have been shut in, vessels are out of position, and workforces have been stood down. That points to six to eight weeks before supply conditions normalise.
What this means beyond the near term – higher mid-cycle oil prices
While there is understandably much attention on what will happen to the spot price, as equity investors, we are equally focused on what mid-cycle oil prices look like once this is resolved. Our view is that mid-cycle prices will be higher than pre-conflict levels for two reasons. Firstly, governments will likely want to refill/expand their SPRs (strategic petroleum reserves), this creates incremental demand which could more than double the underlying rate of global oil demand growth for several years. Secondly, a geopolitical premium in the oil price is likely to persist as Iran has demonstrated it is able to close the Strait of Hormuz at will. Our best guess is that the mid-cycle oil price will move higher (for several years) by ~$5–$10/bl versus the pre-shock consensus of around $70/bl.
