Oil market ‘mispricing’ worst supply shock ever

Oil markets are underestimating the largest supply disruption in history after the Iran war effectively shut the Strait of Hormuz, traders and analysts told attendees to the FT Commodities Global Summit.

Brent crude has swung sharply since the conflict began, briefly nearing $120 a barrel before easing to about $95 on expectations of a diplomatic resolution, even as executives estimate roughly 1 billion barrels of supply have already been lost and warn that figure could reach 1.5 billion if disruptions persist. 

Saad Rahim, chief economist at Trafigura said the scale of the shock has left markets struggling to price risk accurately, the Financial Times reported. Gunvor’s head of analysis Frederic Lasserre, in turn, warned that a prolonged conflict could drain global inventories within weeks.

“The scale seems to be something where the market can’t actually get its head around it,” Rahim said at the FT event in Lausanne. “There is a real disconnect between perception and reality right now.”

Shore Capital equity analyst James Hosie said a fragile ceasefire may mask deeper supply risks, warning the market is underestimating the impact of ongoing disruption.

“A continuation of the current tenuous ceasefire appears the most likely immediate outcome, and we sense that the impact of continued disruption to global oil supplies is being under-estimated by the market,” he wrote in a note on Tuesday. “In our view, this should at least keep spot Brent prices in the $90-100 per barrel range until a robust peace deal is achieved, with any military escalation likely to drive a further price spike.”

Hosie pointed out that Iran has demonstrated its ability to control movement through the Strait, choking off Persian Gulf exports, with vessel rates likely to remain elevated and activity only recovering gradually. Overall, Shore Capital said ambiguity is fostering complacency, with sustained disruption likely to support higher prices until a durable agreement is reached.

The stakes extend far beyond crude prices, as traders warn the loss of flows through Hormuz could ripple across global supply chains, from fertilizer shortages linked to reduced Middle East gas output to disruptions in metals processing due to constrained sulphuric acid supplies, raising the risk of a broader economic slowdown if the strait remains closed.

Amrita Sen, co-founder of Energy Aspects, told the Financial Times that flows may never fully return to pre-war levels. She added that, even in a partial reopening scenario, the market could lose about 450 million barrels of refined fuels such as gasoline and diesel, with limited spare refining capacity delaying recovery well into the next decade.

One billion barrels lost

At least one billion barrels of oil and refined products are now effectively wiped from global supply even if the conflict ends immediately, Russell Hardy, chief executive of Vitol, told the FT conference, describing the disruption as the largest in his nearly 40-year career.

“In round numbers, the 1 billion is baked in now,” Hardy said. “By the time things get moving again, if they get moving again, it takes time to bring all the shut or damaged infrastructure back.”

Hardy said the loss, driven by roughly 12 million barrels per day of disrupted production since strikes on Iran began, already exceeds the scale of the 1990 Gulf crisis, noting that today’s market is tighter and most spare capacity sits behind the Strait of Hormuz, amplifying the shock.

The disruption, equivalent to about 10 days of global oil consumption, has hit Asia, Africa and Australasia hardest and could deepen into a macroeconomic crisis if the strait remains shut. Gunvor CEO Gary Pedersen warned of serious “ramifications,” while Lasserre said a failure to reopen within three months could tip the global economy into recession.

“I think we’re at a very critical inflection point,” Rahim said, referring to upcoming US-Iran talks. “If there is a resolution and things start to normalize, we may have just about dodged a bullet.”

Yet several speakers cautioned that markets may be overly optimistic about a swift deal, with RBC’s analyst Helima Croft noting that geopolitical outcomes depend on multiple actors, not just Washington, and warning that current pricing reflects misplaced confidence in a quick resolution.

(With additional files from Bloomberg)