The markets are definitely underestimating the impact of the Strait of Hormuz closure. I've heard a couple of different theories why, but the best one seems to be that too many traders were burned by overestimating the impact of COVID on the markets, and so now they're overcompensating by underestimating the impact of the energy sector's worst nightmare. And I don't think the markets are going to properly react to the situation until everything goes absolutely haywire.
The closure of the strait has cut off 10-20% of global crude oil supply. We're at the point in the shutdown where all of the transit before the closure has arrived, which means the effect of the supply shock is now that refineries are draining all of their inventories. That means that 10-20% of demand for refined petroleum products will have to pretty sharpish be destroyed. And while people are definitely prepared to understand the impact on things like gasoline for cars or jet fuel for planes, the reality will also include scenarios like "sorry, can't buy milk anymore because no more plastic for milk jugs." COVID-induced supply shortages broke many people; the coming oil-starved supply shortages are probably going to be at least as bad.
And the real kicker is that, even if you wave a magic wand and reopened the Strait of Hormuz tomorrow, mothballed wells and refineries will take many months to spin back up to full production, just from mothballing. And some of them have been struck as military targets, which will take years to get back to full capacity. I think around 10% of world total LNG capacity is offline until 2027 if not 2028 for that reason alone.
Which is to say, it's a speculative bubble and it will burst on its own schedule and for essentially arbitrary reasons and not due to the economic fundamentals of the industries involved.
Which... is something we all basically knew even before the Iran boondoggle. The market is as the market does.
decidedly off topic but since i've stumbled across you again, i'm still over here wondering what the hell you meant a couple months ago by arguing that doing bare syscalls on linux from a forth is an emulator.
it was quite perplexing to be called a sovcit who was imagining some software i've written just because it was rhetorically inconvenient for you that said software existed
Looks like many could be siloed this summer given the increase in fuel prices across the board. That could also be a downward drag on many industries. Even if we were able to get back to where we were 2 months ago today, there would still be noticeable, non-zero impact.
We're not seeing the true scope of just how bad things and are going to get.
There are ~9 different oil "flavors" traded in large volume in the world. The big factors are primarily API gravity [1] and sulfur content. Low sulfur content is generally better but the sulfur is extracted into necessary products (primarily fertilizer). Likewise, the API gravity favors higher gravity, which actually means lighter crude. So when you see terms like "sweet, light crude" "sweet" means "low sulfur content" and "light" is high gravity. But heavier crude still has applications like building roads.
Oil is traded on futures markets. A futures contract is standardized for the type of oil, standard amounts (typically 1000 barrels per contract) and a delivery date. This allows producers to forward sell oil and consumers to forward buy it, both of which are just hedging price risk.
The price you see publicly is the future price. What isn't public is the spot or physical price. Historically those tracked each other. They have diverged in the last 2 months by upards of $40/barrel [2]. We've seen Dubai oil trade at $180+/barrel physical and Brent is really at more like $140-150.
Nobody in the know or in the business trusts the futures prices anymore.
This can happen in what's called a market of extreme backwardation. That simply means the spot prices are higher than the future price. The market seems to believe the supplies are currently constrainted but the Strait will be reopened in the short term. This is likely overly optimistic.
On a side note we saw extreme market backwardation in the silver market in late 2025 where again the paper (future) price was a lie and refiners were buying at the supposed spot price so different circumstances to this.
The second issue is that there have been record releases from strategic reserves to try and stabilize prices [3]. Even so, stockpiles are dwindling of both crude and refined products like avgas and gasoline.
Lastly, if the Strait opened tomorrow it's likely going to take years for oil to reach pre-war price levels and a lot of the problems over the next year or more are already baked in. A whole bunch of harvests have missed being fertilized so you will likely find that tens of millions of people are going to suffer from famine regardless of what happens now.
A lot of professionals are coming to the realization that financial markets are in denial about how bad this is and are going to be (eg [4]).
There are too many moving parts to predict this with any accuracy such as:
1. What happens with interest rates? Powell's replacement will be Kevin Warsh who has seemingly promised to lower interest rates in a short-term ploy aimed at the midterms. Should this happen, it'll likely be a disaster for inflation and the dollar;
2. How and when this impasse ends? Ending tomorrow is still singificantly better than ending in September. Also, there could be a comprehensive deal or Trump could simply walk away and declare victory, essentially leaving the situation unresolved but basically allowing Iran to charge a toll;
3. How bad will inflation get? I think I heard that in 2008 households still saved on average 10% of their income. That's basically 0% now. There simply is no buffer;
4. Does the AI market crash? That could happen but I'm not betting it will. Lookk at how long the market has remained irrational about TSLA;
5. How bad is the energy crunch going to get in Asia and Europe in particular? Unlike 1973, the US might get expensive gas but as a net energy exporter now, there won't be no gas like there was then. Asia and Europe (particularly for heating come winter) are in a different category;
6. What regimes are going to fall from all of this? I don't know what that number will be but I suspect it won't be zero;
7. What political realignments will take place because the US security guarantees (particularly for the GCC) and guarantees of maritime trade (since WW2) have been broken; and
8. How bad are the food shortages going to be? Developing countries will bear the brunt of this of course.
I know your comment was a pun, but I'd rather not miss an opportunity to tell someone on the internet that the US isn't the invincible superpower it thinks it is.
That's just the futures price. If you wanted to buy it, you would be paying $140 plus.There is a growing divergence between futures pricing and actual real world price.
The actual real world price for immediate delivery is called the spot price. The price of the future is just the price for a contract to have it delivered on a certain date.
As I understand it, Oil Futures come in two varieties, one kind result in you actually taking the oil when they happen, which is why that negative price craziness years back because if you're holding the futures and haven't got anywhere to put that oil that's a problem for you. The other kind though is some sort of cash equivalent, I guess maybe it resolves to the current spot price or something at the moment it stops being a future ?
So, for these mispriced Futures, what happens? If I buy $1M of Brent Crude futures and then just wait, and when my futures resolve that much Brent Crude would be worth $1.5M at spot prices do I... get $1.5M and somebody in the oil industry just lost their shirt? Do they just ship me enough Brent Crude to sell it for $1.5M at spot prices? What if they were lying and they can't deliver ?
The markets are definitely underestimating the impact of the Strait of Hormuz closure. I've heard a couple of different theories why, but the best one seems to be that too many traders were burned by overestimating the impact of COVID on the markets, and so now they're overcompensating by underestimating the impact of the energy sector's worst nightmare. And I don't think the markets are going to properly react to the situation until everything goes absolutely haywire.
The closure of the strait has cut off 10-20% of global crude oil supply. We're at the point in the shutdown where all of the transit before the closure has arrived, which means the effect of the supply shock is now that refineries are draining all of their inventories. That means that 10-20% of demand for refined petroleum products will have to pretty sharpish be destroyed. And while people are definitely prepared to understand the impact on things like gasoline for cars or jet fuel for planes, the reality will also include scenarios like "sorry, can't buy milk anymore because no more plastic for milk jugs." COVID-induced supply shortages broke many people; the coming oil-starved supply shortages are probably going to be at least as bad.
And the real kicker is that, even if you wave a magic wand and reopened the Strait of Hormuz tomorrow, mothballed wells and refineries will take many months to spin back up to full production, just from mothballing. And some of them have been struck as military targets, which will take years to get back to full capacity. I think around 10% of world total LNG capacity is offline until 2027 if not 2028 for that reason alone.
I’m going to bookmark this and check back periodically this year to see if I am truly not able to buy milk due to plastic. Interesting prediction.
price shocks don't cause inflation, printing money does.
When you google "whistling past the graveyard" you get a screenshot of the stock market performance for the past month.
This is going to work until all of the sudden it doesn't.
Which is to say, it's a speculative bubble and it will burst on its own schedule and for essentially arbitrary reasons and not due to the economic fundamentals of the industries involved.
Which... is something we all basically knew even before the Iran boondoggle. The market is as the market does.
> … for essentially arbitrary reasons and not due to the economic fundamentals …
When I think about the impact of the war on Iran, it’s pretty clearly affecting “economic fundamentals”. So what are you talking about?
decidedly off topic but since i've stumbled across you again, i'm still over here wondering what the hell you meant a couple months ago by arguing that doing bare syscalls on linux from a forth is an emulator.
it was quite perplexing to be called a sovcit who was imagining some software i've written just because it was rhetorically inconvenient for you that said software existed
Starting to spike in certain states as well: https://www.freep.com/story/news/local/michigan/2026/04/13/m...
Looks like many could be siloed this summer given the increase in fuel prices across the board. That could also be a downward drag on many industries. Even if we were able to get back to where we were 2 months ago today, there would still be noticeable, non-zero impact.
What do you mean by siloed?
Limited in their options. Americans tend to use more gasoline in the summer
https://www.eia.gov/dnav/pet/hist/leafhandler.ashx?n=pet&s=m...
Why? Isn't it the opposite in Europe?
Not traveling or going on vacation.
We're not seeing the true scope of just how bad things and are going to get.
There are ~9 different oil "flavors" traded in large volume in the world. The big factors are primarily API gravity [1] and sulfur content. Low sulfur content is generally better but the sulfur is extracted into necessary products (primarily fertilizer). Likewise, the API gravity favors higher gravity, which actually means lighter crude. So when you see terms like "sweet, light crude" "sweet" means "low sulfur content" and "light" is high gravity. But heavier crude still has applications like building roads.
Oil is traded on futures markets. A futures contract is standardized for the type of oil, standard amounts (typically 1000 barrels per contract) and a delivery date. This allows producers to forward sell oil and consumers to forward buy it, both of which are just hedging price risk.
The price you see publicly is the future price. What isn't public is the spot or physical price. Historically those tracked each other. They have diverged in the last 2 months by upards of $40/barrel [2]. We've seen Dubai oil trade at $180+/barrel physical and Brent is really at more like $140-150.
Nobody in the know or in the business trusts the futures prices anymore.
This can happen in what's called a market of extreme backwardation. That simply means the spot prices are higher than the future price. The market seems to believe the supplies are currently constrainted but the Strait will be reopened in the short term. This is likely overly optimistic.
On a side note we saw extreme market backwardation in the silver market in late 2025 where again the paper (future) price was a lie and refiners were buying at the supposed spot price so different circumstances to this.
The second issue is that there have been record releases from strategic reserves to try and stabilize prices [3]. Even so, stockpiles are dwindling of both crude and refined products like avgas and gasoline.
Lastly, if the Strait opened tomorrow it's likely going to take years for oil to reach pre-war price levels and a lot of the problems over the next year or more are already baked in. A whole bunch of harvests have missed being fertilized so you will likely find that tens of millions of people are going to suffer from famine regardless of what happens now.
A lot of professionals are coming to the realization that financial markets are in denial about how bad this is and are going to be (eg [4]).
[1]: https://en.wikipedia.org/wiki/API_gravity
[2]: https://www.csis.org/analysis/how-interpret-wartime-oil-pric...
[3]: https://www.iea.org/news/iea-member-countries-to-carry-out-l...
[4]: https://oilprice.com/Energy/Energy-General/Is-Reality-Finall...
Spot on (pun intended). This guy knows the oil markets.
What's your take on the probability of a recession given the oil price shock and currently high interest rates? Historical parallels do not look good.
There are too many moving parts to predict this with any accuracy such as:
1. What happens with interest rates? Powell's replacement will be Kevin Warsh who has seemingly promised to lower interest rates in a short-term ploy aimed at the midterms. Should this happen, it'll likely be a disaster for inflation and the dollar;
2. How and when this impasse ends? Ending tomorrow is still singificantly better than ending in September. Also, there could be a comprehensive deal or Trump could simply walk away and declare victory, essentially leaving the situation unresolved but basically allowing Iran to charge a toll;
3. How bad will inflation get? I think I heard that in 2008 households still saved on average 10% of their income. That's basically 0% now. There simply is no buffer;
4. Does the AI market crash? That could happen but I'm not betting it will. Lookk at how long the market has remained irrational about TSLA;
5. How bad is the energy crunch going to get in Asia and Europe in particular? Unlike 1973, the US might get expensive gas but as a net energy exporter now, there won't be no gas like there was then. Asia and Europe (particularly for heating come winter) are in a different category;
6. What regimes are going to fall from all of this? I don't know what that number will be but I suspect it won't be zero;
7. What political realignments will take place because the US security guarantees (particularly for the GCC) and guarantees of maritime trade (since WW2) have been broken; and
8. How bad are the food shortages going to be? Developing countries will bear the brunt of this of course.
I wish I knew.
If this is what winning a war looks like I hope we don't ever lose one.
You've lost Afghanistan and Vietnam.
I know your comment was a pun, but I'd rather not miss an opportunity to tell someone on the internet that the US isn't the invincible superpower it thinks it is.
Many are saying the US just did.
That's just the futures price. If you wanted to buy it, you would be paying $140 plus.There is a growing divergence between futures pricing and actual real world price.
The actual real world price for immediate delivery is called the spot price. The price of the future is just the price for a contract to have it delivered on a certain date.
Spot prices: https://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm
Futures prices: https://oilprice.com/oil-price-charts/
As I understand it, Oil Futures come in two varieties, one kind result in you actually taking the oil when they happen, which is why that negative price craziness years back because if you're holding the futures and haven't got anywhere to put that oil that's a problem for you. The other kind though is some sort of cash equivalent, I guess maybe it resolves to the current spot price or something at the moment it stops being a future ?
So, for these mispriced Futures, what happens? If I buy $1M of Brent Crude futures and then just wait, and when my futures resolve that much Brent Crude would be worth $1.5M at spot prices do I... get $1.5M and somebody in the oil industry just lost their shirt? Do they just ship me enough Brent Crude to sell it for $1.5M at spot prices? What if they were lying and they can't deliver ?
And getting even worse for end use commodities