The sudden closure of the Strait of Hormuz has triggered one of the most significant supply disruptions in the history of global energy markets. With roughly one-fifth of the world’s oil flows affected, the implications extend well beyond near-term price volatility. In this article, we examine the immediate market impact and what it may mean for oil prices, energy equities, and portfolio positioning.
The article below is an excerpt from our Q4 2025 commentary.
The outbreak of hostilities in the Persian Gulf has already reverberated through global oil markets with remarkable speed. Rather than attempt a full survey of supply-and-demand trends in both oil and natural gas—topics we will return to in a future letter—we will focus here on the more immediate consequences arising from the effective closure of the Straits of Hormuz. In our next quarterly commentary, we intend to revisit the broader fundamentals, including production trends, depletion dynamics, balancing items, and inventory behavior, in both the global oil market and the U.S. natural gas market.
"By the metric that ultimately matters most to energy markets—daily physical volume—the disruption may already rank as the largest shock the industry has ever experienced."
As we go to press on March 11, 2026, the Straits of Hormuz remain effectively closed, disrupting the transport of roughly 20 percent of global oil production and a similar share of seaborne LNG supply. In absolute terms, this represents approximately 20 million barrels per day of crude oil and about 10 billion cubic feet per day of liquefied natural gas. By the metric that ultimately matters most to energy markets—daily physical volume—the disruption may already rank as the largest shock the industry has ever experienced. The consequences have been immediate: refiners around the world have begun scrambling for alternative crude supplies, often at sharply higher prices.
China responded quickly by imposing export restrictions on refined petroleum products on March 11th, seeking to safeguard its own domestic supply. As rising U.S. shale production has dramatically reduced American reliance on imported oil, China has emerged as the world’s dominant crude importer by a considerable margin. Much of these imports originate in the Persian Gulf and, increasingly, from Iran itself. Indeed, in many strategic war-game scenarios involving a hypothetical Chinese invasion of Taiwan, analysts have long assumed that one of the earliest moves by adversaries would be an effort to choke off oil shipments to China through the Straits of Hormuz and the Straits of Malacca. In a sense, a version of that scenario is unfolding today.
Refining margins—so-called crack spreads, which measure the difference between crude prices and refined product prices—have widened dramatically, reaching levels not seen since Russia’s invasion of Ukraine in 2022. Brent crude, which had fallen as low as $59.96 per barrel on January 7 and averaged only about $70 per barrel in the days preceding the conflict, surged to an intraday high of $119.50 on March 9 before retreating to roughly $90 per barrel. Longer-dated Brent futures have moved far less dramatically. As of this writing, contracts further out on the curve are trading around $74 per barrel, suggesting that traders still view the present disruption as temporary—at least for now.
In response, the International Energy Agency convened an emergency meeting of OECD member states. Reports circulating in the market suggest that policymakers are considering a coordinated release of as much as 400 million barrels from government strategic petroleum reserves. If approved, the release would represent the largest drawdown of strategic stocks ever undertaken—more than double the volume released following Russia’s invasion of Ukraine in 2022. Yet even this unprecedented measure would only partially offset the disruption. After several large drawdowns over the past five years, OECD strategic reserves stand at roughly 1.2 billion barrels, meaning the proposed release would amount to nearly one-third of the remaining stockpile. Even so, it would cover only about twenty days of supply lost as a result of the Hormuz closure.
Much will depend on how events evolve in the coming days. The implications are likely to extend well beyond the immediate crisis. In the near term, attention remains focused squarely on the Strait itself. Several producing countries—including Saudi Arabia, Iraq, and the United Arab Emirates—have already been forced to curtail field production temporarily as onshore storage facilities have reached capacity. Saudi Arabia does possess one important advantage: the East-West pipeline, which allows crude to bypass the Persian Gulf entirely by transporting it across the Kingdom to the Red Sea. Even so, the pipeline’s capacity is roughly 2.5 million barrels per day below Saudi Arabia’s recent production levels. Other producers in the region have no comparable outlet.
Over the medium term, the extent of damage to the region’s energy infrastructure remains uncertain. Thus far, the United States and Israel appear to have avoided direct attacks on Iran’s oil facilities, presumably to preserve the possibility of post-conflict economic recovery. Iran, by contrast, has reportedly targeted storage tanks, pipelines, and refining assets in Qatar, the UAE, and elsewhere in the region. The apparent logic behind these strikes is straightforward: by inflicting maximum disruption on oil markets, Iran may hope to place political pressure on the United States and Israel as energy prices rise.
There is precedent for such tactics. In 2019, Iranian-backed Houthi rebels launched a sophisticated attack on Saudi Arabia’s Abqaiq processing complex, a facility responsible for processing nearly six million barrels per day of crude. Many analysts later suggested the strike had been intended as a proof of concept—a rehearsal, of sorts, for more consequential attacks in the future. The Houthis targeted stabilization towers and storage tanks with remarkable precision, focusing on components that could be repaired relatively quickly. Saudi Aramco restored the facility to near-full operation within weeks. Whether Iranian forces will display similar restraint in the present conflict remains doubtful.
The turmoil has unfolded against a striking backdrop. At the beginning of 2026, crude oil was arguably the most disfavored major asset class in global markets. Energy equities accounted for only about 3 percent of the S&P 500’s market capitalization—barely above their pandemic-era lows. Oil itself traded at record lows relative to gold and close to historic lows in inflation-adjusted terms. Among speculative traders, the dominant strategy had increasingly been to bet against the commodity. Net speculative positioning in WTI futures on the NYMEX exchange began the year at its most bearish level in fifteen years, and gross short positions had risen to their highest levels since 2016.
Much of this pessimism stemmed from the International Energy Agency’s persistent narrative that the world was facing what it described as the largest oil surplus in history. We have long taken a different view. According to the IEA, global oil production exceeded demand by 2.2 million barrels per day in 2025, with the surplus expanding to roughly 3.0 million barrels per day during the fourth quarter. If those figures were correct, global inventories should have surged. In practice, they barely budged.
OECD inventories increased by only about 200,000 barrels per day over the course of 2025— far below what would have been expected if the market had truly been oversupplied by more than two million barrels per day. The discrepancy becomes even more striking in the fourth quarter. Instead of building by three million barrels per day, as the IEA’s supply-demand balance implied, inventories actually declined by roughly 200,000 barrels per day. The agency accounted for the difference through a statistical category it labels “miscellaneous to balance”—a line item we have occasionally referred to, somewhat irreverently, as the “missing barrels.” These are barrels that appear to have been produced but neither consumed nor stored. We will return to the subject in more detail next quarter. For the moment, it is sufficient to note that the oil market may be far tighter than commonly believed.
Against that backdrop—an already tight market, record-bearish speculative positioning, and now the closure of the Straits of Hormuz—short covering has been intense. We suspect that a substantial portion of the surge toward $120 per barrel reflected margin calls and the forced liquidation of speculative short positions. Several reports have circulated in recent days describing hedge funds shutting down their energy trading desks entirely, while large physical trading houses have reportedly raised tens of billions of dollars to reinforce their margin reserves and working capital. It is difficult to imagine a firm dismantling its energy trading operation at such a moment unless its positions had been severely wrong-footed.
Over the longer term, the most important consequence of recent events may simply be that investors are forced to look again at a sector they had largely ignored. The shale boom provided an enormous buffer of production growth during the past decade, but that growth is now slowing and in many regions turning negative. Meanwhile, an entire generation of market participants has grown accustomed to approaching oil from the short side. Genuine oil bulls have become a rarity.
For years, the prevailing view has been that the oil industry belongs to a bygone era—that it represents, in effect, a barbarous relic of the industrial past. The same sentiment prevailed toward gold in the late 1990s, shortly before the metal embarked on one of the most remarkable bull markets in modern financial history. It may be that the events of the past several weeks will serve as a reminder that the oil market, however unfashionable it may sometimes appear, remains one of the most consequential markets in the world—and one that investors ignore at their peril.
Curious to learn more now? Read more in our Q4 2025 research newsletter, available for download below.
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