Between Two Phases

Even if the U.S. ends its war with Iran in the next few weeks, it's uncertain whether the Strait of Hormuz will reopen in the near term, likely keeping oil prices elevated. We outline two key phases to assess where we go from here.

Since our initial assessment last month of the risks to oil markets from the Iran conflict, the situation has oscillated almost daily between escalation and de-escalation, whipsawing energy and risk markets.

This was demonstrated in the space of 24 hours last week when reports that President Trump was looking for an off-ramp first becalmed markets—pushing the oil price below $100 and triggering a rally across global markets—before he warned of further escalation during his national TV address on Wednesday, sending markets in the opposite direction.

Such volatility isn’t going away, and so long as the Strait of Hormuz remains effectively closed, we expect the oil price to stay elevated, in turn carrying real economic implications. We estimate, for instance, that each incremental $10 added to oil prices represents roughly 0.1% of U.S. growth foregone, an aspect of the economic impact analysis we highlighted here last week.

The situation clearly continues to be highly complex and fluid, and the gap between political rhetoric and physical oil flows is wide. In this context, we see the impacts unfolding across two distinct phases. Understanding where we sit between them is key to assessing what comes next.

Phase 1: Destocking

Global oil and product inventory levels were largely healthy coming into the conflict, and refiners will need to lean on these inventories to source crude while the Strait is effectively closed. This marks the destocking phase of the crisis, where everything that can be done to soften the supply loss is being done: workarounds, buffer zones, diplomatic levers, reserve releases. We think oil prices can remain in the ~$100 per barrel range during this period, a level we characterize as high but palatable.

The duration of this phase hinges on the scale and persistence of the supply shortfall. The International Energy Agency (IEA) estimates that 15 million barrels per day (b/d) of black oil exited the Strait prior to this conflict. Currently, only Iranian oil, at ~2 million b/d, remains in transit, leaving a gap of approximately 13 million b/d. Saudi Arabia has begun to reroute an estimated ~3 million b/d via its east-west pipeline to the Red Sea port of Yanbu, though this infrastructure must remain intact and accessible.

Importantly, the U.S. is also tapping its Strategic Petroleum Reserve (SPR) along with global partners. We estimate ~2 million b/d of SPR drawdowns globally, though final volumes are pending confirmation. The IEA estimates the conflict has resulted in ~1 million b/d of demand loss, partially driven by jet fuel losses due to flight cancellations in the region.

In aggregate, the net supply gap may be closer to ~6 million b/d—still a stress level for the oil market, but more manageable than the headline 15 million b/d loss suggests, and sufficient to extend the destocking phase while diplomatic or military resolution is pursued.

Phase 2: Demand Destruction

Destocking measures extend the runway, but the longer the Strait’s de facto closure lasts, the greater the probability that prices must rise sharply enough to destroy demand. Inventories are finite. SPRs are finite. The longer the closure persists, the more draconian the required response, whether that means consumers simply priced out of fuel consumption or harder policy interventions such as product export bans in the U.S., though we view this as a low probability based on what we know today.

We are watching early signs that we may be at the beginning stages of this transition, with regional dislocations in both Asia and Europe pointing to a system under growing strain. In contrast, the U.S. is in a relatively good position given its high domestic oil and liquids production and large refining footprint. Our base case: fuel prices will be high in the U.S., but shortages are unlikely. Policy steps could help here. The administration recently announced a 60-day Jones Act waiver, which helps support flows by temporarily allowing foreign-flagged ships to move fuel between domestic ports. This is particularly helpful for product flows to the East and West coasts, where the U.S. imports refined products.

Although we are not there yet, and may not even get close, we think material demand destruction happens in the $150 – $180 per barrel range, when we estimate oil spend as a percent of global GDP approaches 5 – 6%. It is worth emphasizing, however, that prices need to reach that level and stay there for a sustained period to cause serious economic harm. It is duration, not the initial shock, that ultimately impairs growth. With that in mind, our base case—if the closure extends from several weeks into several months—is that prices grind toward a range we characterize as severe and economically damaging.

Duration, Disruption and the Energy Hedge

Duration remains the key dimension of this analysis—and the variable that matters most for investment positioning. The ~6 million b/d net supply gap is manageable, not comfortable, provided Saudi bypass infrastructure holds. A sustained closure of the Strait, structural damage to Middle East fields or refining infrastructure, or a strike on Yanbu port would each represent a material shift to a more severe phase, with correspondingly sharper implications for growth, inflation and risk assets.

Against that backdrop, the energy sector’s behavior during this crisis carries an important signal for portfolio construction—and a measure of reassurance. The S&P 500 index’s energy segment is up approximately 32% year-to-date (as of April 1), significantly outperforming a modestly lower broader market, functioning precisely as a geopolitical hedge should. This performance highlights the market's recognition that energy exposure provides genuine diversification value in an environment where the traditional drivers of risk and return have been temporarily upended.

That balance, however, is delicate. We are neither in the clear nor in crisis—we sit somewhere between the two phases. Duration remains the axis on which everything turns. What began as a geopolitical shock is threatening to become a test of economic resilience.