The Iran war has shattered oil's price compass

LONDON — The Iran war has exposed a dangerous divide in global oil markets, where physical crude prices are surging to record levels while futures benchmarks continue to signal relative calm. The disconnect is leaving consumers, companies, and policymakers without a reliable guide for decision-making and could leave a lasting impact on the global economy.

Investors have struggled to properly price the unprecedented disruption to global oil supply after Iran effectively closed the Strait of Hormuz following U.S.-Israeli strikes on February 28.

The blockade has cut off nearly one-fifth of global oil flows, triggering acute shortages in Asia and increasingly in Europe, while forcing Gulf producers to shut in around 9 million barrels per day of output.

Brent crude futures surged 64% in March, marking a record monthly gain and peaking at $118 per barrel. Prices later eased to around $95 after a ceasefire agreement between the United States and Iran on April 7. However, renewed tensions following the breakdown of peace talks and U.S. President Donald Trump’s decision to restrict maritime access to Iranian ports pushed prices back toward $100 per barrel.

Despite the volatility, market moves have remained relatively contained compared with the scale of supply losses, which are estimated to have exceeded 600 million barrels.

In contrast, physical crude markets have reacted far more sharply. Dated Brent, which reflects crude delivered to northwest Europe, has climbed to around $120 per barrel—roughly 65% above pre-war levels and its highest since 2022.

Other physical benchmarks have also surged to record highs, with North Sea Forties crude briefly approaching $150 per barrel earlier in the week, underscoring the severity of the supply shortage.

Wide Gap Between Paper and Physical Markets

The divergence between futures and physical oil prices is among the widest on record, even compared with the COVID-19 pandemic period when global demand collapsed sharply.

Analysts say part of the gap is driven by technical differences. Brent futures price oil for delivery roughly two months ahead, while Dated Brent reflects cargoes loaded within 10 to 30 days. The spread suggests futures markets are betting on a relatively quick easing of the crisis.

Some of that optimism is tied to expectations that political pressure, particularly concerns over high U.S. gasoline prices, could push Washington to avoid prolonging the conflict. Ample global inventories entering the crisis have also helped soften the initial shock.

However, analysts warn that this optimism may not align with physical realities. Even after a full reopening of the Strait of Hormuz, restoring Middle East oil production and export capacity to pre-war levels could take months or even years.

Demand Pressure and Market Risks

If the supply shortfall priced into futures markets fails to materialize during the peak summer demand season in the Northern Hemisphere, the misalignment between physical and paper markets could widen further, with broader consequences for the global economy.

A breakdown in Brent’s pricing structure—the benchmark underpinning global oil markets—could distort decisions by governments, businesses, and consumers worldwide.

Policymakers are already adjusting their outlooks. The International Monetary Fund recently raised its base-case oil price forecast for 2026 by 30% to $82 per barrel, while trimming its global growth forecast to 3.1%, reflecting rising energy risks.

The futures curve continues to suggest that prices will remain near historical norms in the coming months. Yet physical market signals tell a more severe story.

Refining Strain and Economic Impact

While refiners initially benefited from using lower-cost pre-war cargoes while selling refined fuels at elevated prices, that buffer has now largely disappeared. Most of the pre-blockade crude shipments have been processed in Asia and Europe, tightening supply conditions further.

Asia, which depends on the Middle East for roughly 60% of its crude imports, is now facing increasing pressure, along with European refiners.

Refining margins are compressing rapidly, raising the likelihood that plants will reduce operating rates or shut units, which could weigh on broader economic activity.

Energy price volatility is also complicating inflation assessments and policy responses, with central banks expected to look through short-term spikes but still facing uncertainty over longer-term effects.

Meanwhile, the steep futures curve is making it more difficult for airlines and fuel-intensive industries to hedge costs, increasing financial pressure and discouraging investment and risk-taking.

Ultimately, the most significant risk may not only be the physical disruption in oil supply, but the breakdown in price signals across the market.

When physical crude trades at extreme premiums while futures suggest stability, the global economy is left operating without clear direction—raising the risk of a sudden repricing shock if market expectations rapidly shift. -Ron Bousso;Editing by Marguerita Choy/Reuters