Oil price movements since the start of March have sparked dozens of discussions. Many observers have been puzzled by futures prices and why they have not surged sharply despite severe disruption to Middle Eastern supply. The explanation, it appears, is optimism and a bet that markets can adapt. The problem is that adaptability has limits.

Many commentators have compared the current oil price and supply situation with 2022, when Russia’s incursion into eastern Ukraine triggered a genuine surge in oil prices and Brent came close to $140 per barrel. At the time, the biggest fear in oil markets was that Western sanctions would cripple crude and fuel flows from the world’s second-largest exporter. Yet oil, in effect, found a way, and Russian oil, gasoline, and diesel continued flowing abroad.

That experience underpins the current optimism around Middle Eastern oil. For a time, it was a reasonable enough basis for confidence, even though the Middle Eastern disruption was far greater than the Russian one, and much more literal. Iran closed the Strait of Hormuz, oil infrastructure came under drone and missile strikes, and Gulf states had to shut wells because of a lack of storage capacity. Yet the region adapted.

Saudi Arabia redirected oil flows from east to west and used the Red Sea port of Yanbu to ship crude abroad. The United Arab Emirates also redirected flows, and Iraq is considering doing the same once it has the capacity. In other words, the market adapted. That has helped cap futures prices, alongside a broad expectation of a peace deal despite little evidence that either side in the conflict has a real desire for peace. The optimism has continued despite broken ceasefire agreements, inflammatory rhetoric, mutual threats, and repeated failed negotiations.

The belief that adaptability will continue to outweigh physical supply disruptions appears to remain strong, even as warning signs become harder to ignore. Reuters’ Clyde Russell summed up that view this week, writing that “In effect, it may be the case that the market is betting that crude and refined product traders will be able to mitigate the worst of the Iran crisis.”

For those making that bet, the signals in oil products are turning more alarming. Crack spreads are at all-time highs, indicating a tighter market, and some analysts say this may only be the beginning. Since the spring, some market watchers have warned that if the war extended beyond June, all bets would be off, with global crude inventories falling and fuel shortages emerging.

That is now what appears to be happening, although perhaps more slowly than many would expect given the scale of recent events. Global oil inventories are not yet depleted, but they are being drawn down sharply, and the U.S. Strategic Petroleum Reserve is nearing a critical level. Supplies of gasoline, diesel, and jet fuel are tightening because demand is outpacing supply, a reminder that product markets can show strain before headline crude benchmarks fully reflect it.

Still, optimism persists. Brent and WTI are both below $90 per barrel because the U.S. and Iran are not currently bombing each other across Hormuz. There is no solid evidence of a real effort to reach peace, only a pause in hostilities. For now, the more useful signal may be in physical markets, shipping routes, and refined product availability than in futures oil price charts.

By Irina Slav for Oilprice.com

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