Oil markets faced intense volatility during the war with Iran, which disrupted global energy flows following the essential interruption of transit through the Strait of Hormuz after US-Israel strikes. The blockade removed a significant portion of the global supply of crude oil and LNG, creating one of the largest supply shocks in modern energy history. Brent crude rose from approximately $70 per barrel before the conflict to a peak of $118 in March, before retreating back near $83 following the announcement of a preliminary US-Iran agreement. This relative stability reflected not only physical market adjustments but also expectations for political decisions in Washington and Tehran.
The "Trump put" in oil markets
A critical factor in trader behavior was the belief that US President Donald Trump would not allow energy markets to evolve into a full-blown inflationary shock. This expectation, known as the "Trump put," implied that political authorities would intervene directly or indirectly before oil prices reached levels that would cause intense inflationary pressure or political costs, particularly in the US. As a result, traders hesitated to price in the worst-case supply disruption scenarios, even as inventories dwindled and global supply was under strong pressure. Conversely, the drop in inventories was interpreted as increasing pressure for a diplomatic solution rather than as a sign of structural imbalance.
How the physical market absorbed the shock
Despite the geopolitical turmoil, the global oil system absorbed the shock better than initial estimates. Strategic petroleum reserves and commercial inventories were released on a large scale, offsetting the loss of production from the Middle East. At the same time, the demand side adjusted quickly: crude imports from China weakened, and several Asian economies reduced consumption due to price volatility. The combination of supply flexibility and demand adjustment allowed the market to "bend without breaking," despite the temporary removal of approximately 1.4 billion barrels from circulation.
Why prices did not skyrocket uncontrollably
Historically, the closing of the Strait of Hormuz is considered one of the worst-case scenarios for energy markets. However, this time the reaction was more restrained. Critical factors included high inventory levels before the war, the massive release of strategic reserves, faster-than-expected demand adjustment, and the expectation of immediate diplomatic de-escalation. The result was a highly volatile but controlled market, without a sustainable surge above previous historical crisis highs.
The dynamics after the agreement
The preliminary US-Iran agreement for the reopening of the Hormuz was a turning point, leading to a rapid de-escalation of prices and expectations for the normalization of shipping flows. However, the underlying imbalance has not disappeared completely, according to the analysis of Modern Diplomacy. Global inventories have decreased significantly, and their replenishment requires time and stable demand. Meanwhile, the restoration of supply from Gulf countries may prove faster than expected, creating a potential mismatch between supply and demand.
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