Oil Shock Deepens as Strait of Hormuz Choke Hits Supply

Global oil markets are reeling after the International Energy Agency warned of a historic supply shock, with production plunging by more than 10 million barrels per day in March following the breakdown in diplomacy between the US and Iran.

The disruption centres on the Strait of Hormuz, where flows have collapsed from 20 million barrels per day in February to just 3.8 million in early April. The scale of the decline marks the largest supply disruption on record, sending shockwaves through physical markets.

Crude prices have responded unevenly. North Sea Dated surged to $130 per barrel, while futures benchmarks like Brent and WTI continue to trade closer to $96–$98. The divergence reflects extreme tightness in the physical market, where prompt cargoes are commanding premiums of $20–$30 above futures.

On the supply side, the fallout across the OPEC+ bloc has been severe. Output dropped by 9.4 million barrels per day in March alone. Saudi Arabia’s production fell sharply from 10.4 million to 7.25 million barrels per day, while Iraq saw an even steeper collapse, losing nearly two-thirds of its capacity. Kuwait and the UAE also posted heavy declines.

Efforts to reroute exports via alternative pipelines and west coast terminals have only partially offset the disruption, with flows rising to 7.2 million barrels per day—far short of plugging the gap.

The supply crunch is now feeding into demand destruction. The IEA estimates global oil demand has already contracted by 2.3 million barrels per day in April, led by sharp cutbacks in Asian petrochemicals and widespread flight cancellations across Europe and Asia. Refiners are also under pressure, with crude runs expected to decline by 1 million barrels per day through 2026.

Meanwhile, inventories are being rapidly depleted. Global stockpiles fell by 85 million barrels in March, although regional imbalances persist. Stocks in Asia have dropped sharply, while barrels remain stranded in the Middle East and China, unable to reach global markets.

A two-week ceasefire between Washington and Tehran has offered temporary relief, but uncertainty remains high. With a potential US blockade of Iranian ports looming, the risk of prolonged disruption continues to hang over markets.

Market Outlook

Oil markets are entering a phase where geopolitics is overriding fundamentals, and the current dislocation between futures and physical prices is unlikely to persist. If supply disruptions continue and the Strait of Hormuz remains constrained, physical tightness could drag benchmark prices significantly higher, potentially forcing Brent back toward triple-digit territory.

However, the rapid onset of demand destruction introduces a counterweight. As high prices bite into industrial activity and travel demand, downside pressure on consumption could cap gains over the medium term.

In the absence of a sustained diplomatic breakthrough, markets should prepare for continued volatility, wider spreads, and structurally tighter energy conditions into the second half of the year.