With the war in Iran, the on-again and off-again nature of the cease fire, the reports of ships going through the Strait of Hormuz, and then the new that ships were targeted and hit by Iran, the whirlwind of news can become very confusing. Meanwhile, the price of oil has continued to fluctuate, the dizzying array of news flashes is driving reactions on Wall Street and day traders, trying to outsmart oil and gas futures. OIl prices have fluctuated by as much as 50%, and have finally settled in the last week to the $70-$74/bbl range. And gas prices have followed along with this shift, reflecting what global oil prices are doing, settling this week around $3.56/gallon, still much higher than the $2.73 prices earlier in the year.

So what gives? What can we expect?

The problem, that many economists understand, is that over the last decade there has been a decoupling of the financial aspect of oil and gas trading versus the physical flows of what is happening on a global scale. We know that over the last 100 days, since the beginning of the Iran war, oil inventories have been depleted significantly, down to levels that are dangerously low.

Given the price that we have in place, replenishing that supply of oil isn’t going to occur overnight.

Wood Mackenzie analysts indicate that Brent crude oil prices could reach up to \(\$200\) per barrel under extreme downside scenarios, though they have adjusted short-term forecasts to average \(\$78\) per barrel. [1, 2]

The primary predictions and assumptions include:

• Short-term Baseline: Brent crude is forecast to average \(\$78\) per barrel, with potential to ease to \(\$70\) per barrel in the latter part of the year. This scenario assumes that shipping recovers and phased re-openings occur in constrained regions. [1]
• Extreme Spike Case (\(\$200/\text{bbl}\)): Reaching \(\$200\) per barrel is considered possible if there is a severe, prolonged shutdown of global shipping routes—specifically the Strait of Hormuz—removing over 15 million barrels per day from the global market. [1, 2, 3, 4, 5]
• Demand Destruction: The extreme price assumptions are driven by a severe imbalance rather than market growth. Analysts assume that the global economy would be forced to endure painful demand destruction, requiring consumption to drop by roughly 6 million barrels per day to rebalance the market. [1, 2, 3, 4, 5]

Moreover, as we hear on Bloomberg, there is more traffic, but at the same time, there is also quite a bit of disruption that is already taking place. For instance, over the weekend another announcement came out of Iran attacking more US sites in Bahrain. So, it is a difficult moment. On top of this, the administration has a very strong interest in maintain a narrative that the Strait is open for business, and ships are flowing through. This narrative is quite a self-fulfilling situation in the marketplace, where prices are going to go down based on the news, and it is true that eventually production is going to pick up. But the reality is the world does not run at the same speed at which our politicians want it to run. There are some physical limitations.

Even as prices have gone down, we find ourselves in the situation where we may not have enough supply to meet the world’s needs. Why? Because the oil traders, are afraid of speculating in a way that will essentially punish them. so they continue to speculate on the assumption that oil flow through global channels like the Strait is picking up. This was further supported by this administration releasing information that “we have a deal” and so that immediately created a drop in oil price. And s traders need to be able to make money over a certain period of time, so they are going to profit on that information. why they will go into a direction that eventually is going to make them generate losses. And so that’s the reason why you’re seeing contracts that are not necessarily aligned with what the actual conditions are…

The reality is that even if the Strait were wide open, it will take some time for oil to flow as it did before. There was significant damage to oil refining infrastructures, as well as severe damage to the world’s largest LNG facility in Qatar (where another explosion occurred last week).

We aren’t out of the woods yet…