On March 31, the global oil benchmark Brent crude traded at a high of $126.69, and Fereidun Fesharaki, the chairman emeritus of a global energy consultancy, told Bloomberg that a prolonged near-closure of the Strait of Hormuz would put the price at $150 to $200 per barrel within weeks. Similarly, banking giant JPMorgan modeled the price at $150 per barrel within a month of a full closure, while global financial firm ING forecasted the price at $140 in its worst-case scenario.
In reality, Brent peaked seven days later at $138.21 and then fell. In the more than four months since, the price of Brent has experienced many swings but has not approached $150 on a single trading day. It has spent 64 percent of those days below $100, averaged $94.10, and even the July re-escalation of hostilities between the United States and Iran has not driven the price significantly past $100 per barrel.
Of course, today’s price is markedly higher than before the war started in late February. But the fact that prices never reached their projected levels raises important questions about market fragility and resilience, what is actually driving the wild swings in prices since the war began, and what can be expected during what appears to be a prolonged period of stress on global energy supplies. The underlying reason for the lower-than-expected and unstable prices is the market’s persistent bet that the Strait of Hormuz—which has been declared closed six times in five months—will reopen soon and durably. That wager holds the price far below what the lost volume implies, jolts it each time it is doubted, and, were it to be widely abandoned, could shoot the price violently upward.
The Price Puzzle
Gulf hydrocarbon production has been hostage to the U.S.-Israeli war with Iran for almost half a year. Saudi Arabia exported 7.28 million barrels of crude per day (bpd) in February. But by April, it was exporting 3.99 million bpd, a 45 percent drop. Gulf countries without an alternative export route bypassing the Strait of Hormuz have fared much worse. Kuwait’s crude exports fell from 1.21 million bpd in February to 0.041 million in April, for example.
With about 15 percent of global oil supply effectively vanishing overnight, physical damage to production and logistics infrastructure, and significant geopolitical uncertainty about when the crisis would be resolved, oil prices remained low relative to initial estimates. Some of this can genuinely be explained by supply-and-demand dynamics. Producers outside the Gulf raised output; the U.S. waived sanctions on Russia and, initially, on Iran; the International Energy Agency took a “whatever-it-takes” approach to drawing down reserves; China decreased its imports after having spent years building up reserves and cutting its exposure to Gulf crude; and industrial users curtailed consumption. But this still does not account for a gap of $50 to $110 per barrel, nor does it explain the price’s extreme volatility.
Furthermore, supplies were further squeezed as the war prolonged. On April 13, Washington enacted a naval blockade on Iran, obstructing an estimated 1.7 million bpd from reaching markets, mostly bound for China. On July 20, Yemen’s Ansar Allah group, popularly known as the Houthis, declared a blockade on Saudi Arabia’s shipping through the Bab al Mandab Strait and set two Saudi tankers ablaze in the Red Sea. With Hormuz already shut, closing the maritime chokepoint at the other end of the Arabian Peninsula left a fifth of the world’s oil exports stranded. That so much supply could be pulled from the market, or threatened, and the price still has not come close to its forecasts, is the measure of the puzzle.
This can be partially explained by how oil prices are reported in the media. Physical Brent, the price paid for a cargo delivered, persistently ran above the futures price—an agreed-upon value for a future delivery—which is generally what is cited in the news. The gap is usually negligible, averaging $0.88 in 2025; but in April 2026 it averaged $15.19, reaching $28.94 on April 7. For most of that month, in other words, the quoted price massively understated the cost of a barrel. That gap then closed, with the physical premium all but disappearing. At the time this looked like the market calling the crisis over. But the premium promptly reopened, and the futures price itself swung hard along with changing expectations of the war’s end.
Jittery Markets
A depressed price is really a wager that the disruption is temporary and a settlement is near. But confidence in this outcome with respect to the Iran war is skin-deep and easily upset, as realized volatility in Brent rose from 34 percent annualized in the two months before the war to over 100 percent in April, eased to 49 percent by June, and has climbed again since, to around 85 percent—roughly two and a half times its pre-war level. The swings are the wager being placed, lost, and placed again. The pattern is easiest to understand against the war’s own timeline (Figure 2). Sustained volatility of that kind indicates a market that keeps forming a belief and abandoning it in rapid succession. Corroborating that market jitteriness is that four of the five biggest single-day moves of the war were downward.
Conversely, looking at twenty-three dated escalation events, seven of them moved the price down, but the average response was a gain of 2.4 percent, meaning that traders have repeatedly treated escalation as the prelude to a settlement. They have also been specific about what frightens them. Attacks on ships moved the price by an average of 4 percent; American strikes on Iran moved it by 1.7 percent, barely distinguishable from an ordinary day. The market thus seems to price mostly interdiction, which influences whether cargo physically moves, and the market has been willing again and again to believe that it soon will.
The same restlessness is visible in the geography of the price. Brent is the benchmark for oil that moves by sea, so it carries whatever the world is willing to pay to replace the barrels stranded behind the chokepoints. West Texas Intermediate (WTI), the American benchmark, is priced off crude sitting in tanks in landlocked Oklahoma—barrels that never go near the Strait. The gap between the two is therefore about as close as the market comes to putting a number on the risk of getting oil out of the Gulf, and that gap has swung as violently as Brent itself. It ballooned to nearly $26 per barrel in early April, then all but vanished to $1.20 by mid-July as the market talked itself into an imminent settlement, and has since widened again to $8.49, more than double its 2025 average of $3.58 (Figure 3). The gap, in other words, did not narrow and settle; it deflated during the lull and has inflated again. And it did so while nothing on the water improved: Saudi and Emirati throughput on the Gulf coast was still down roughly three-quarters year on year in July, and both straits were effectively closed. The market is therefore not revising its estimate of the danger so much as repeatedly changing its mind about how soon the danger ends.
So far, changing its mind has cost the market little, because every reversal has come full circle, each collapse of hope has been redeemed by the next burst of hope, and the price has returned to roughly where it began. But the wager is asymmetric. It rests on an expected reopening whose failure has no natural ceiling, and shattering that hope would move the price toward the $150 to $200 that the lost supply actually implies.
Outlook
What the data reveals is that the current price of oil is not a judgment about current supply but about diplomacy and strategy, and how they influence expected future supply, that is, a standing bet that the straits around the Arabian Peninsula reopen durably and soon. The market placed—and lost—that bet repeatedly since February: after the Islamabad talks, after the pause in Operation “Project Freedom” in May, and most expensively after the U.S. and Iran signed a memorandum of understanding on June 17, which pushed the Brent price to a wartime low of $68.53 on July 2 before the truce collapsed six days later and the price climbed back to $100 in less than three weeks.
The pre-Islamic Arabs, relates al-Ṭabarī, were “stuck on a rock between two lions, Persia and Rome.” The Gulf today sits on a similar rock, with the oil market having spent five months betting that one of the lions is about to walk away. But current developments suggest that the market bet may lose, sending oil prices to new extremes and the regional and global economy into recession. These developments include: a conflict—and blockage—that outlasts the market’s patience; the loss of the one bypass that provided relief, the Saudi East-West pipeline; the realization that a maritime chokepoint declared closed six times in five months will not reopen reliably in the near term; the lack of a plausible path to the status quo ante, with the prospect of durable Iranian Strait control as the new normal, including a transit regime and fees; and, perhaps most importantly, the inability of diplomacy to bridge the near-impossible gap between hardened positions and adversaries with zero mutual trust.
