The global oil market has been on a rollercoaster since late February, but the price reaction to the largest supply disruption in history has been relatively muted. The calm was not complacency; buffers were there to absorb the shock. But the system that held for four weeks is no longer the system we are operating in today.

For nearly four weeks, the crude oil market has displayed remarkable resilience, holding together in the face of a 17.8 million barrels-per-day trade flow lost out of the Strait of Hormuz (of which 14.2 million bpd is crude and condensates).

The relatively muted price reaction was possible because the market entered this crisis with a heavily buffered system.

But that buffer has disappeared.

The global oil system can no longer absorb shocks the way it could three weeks ago.

Any secondary disruption that would have generated a linear, manageable price response in a buffered system – such as an outage at the CPC pipeline from the Caspian through Russia, an active hurricane season, or infrastructure damage at Yanbu or Fujairah – would now hit a market with no absorptive capacity left.

The floor has moved up.

So has the ceiling.

And critically, the distance between a routine supply event and a disproportionate price move has collapsed.

This is no longer a market that is tight for a couple of weeks, it is a market that will be fragile for longer.

That distinction is what the crude oil price does not yet fully reflect.

Before this conflict, the world was expecting a crude oil surplus of roughly 3.0 million bpd this year, onshore and offshore inventories were ample, and there was healthy spare production capacity, albeit very localized.

Those combined “extra” barrels allowed the market to absorb a supply shock that, in any other starting configuration, would have caused prices to react more violently.

Those buffers are now largely consumed, and the system that absorbed the initial shock is not the system operating today.

Nearly 500 million barrels of total liquids have been lost in the disruption so far.

The combined policy response of strategic petroleum reserve (SPR) releases by the International Energy Agency (IEA) and waivers of sanctions against Russian and Iranian crude amount to about the same volume. In addition, excluding offshore inventories, the release rate of those policy barrels is far slower than the 17.8 million bpd loss rate of crude and oil products combined.

In past coordinated releases, total IEA flows have not reached above the 2.0 million bpd mark of sustained flows, which provides a good empirical reference point to assume that the actual deliverable volumes at system level will not hover much above that level (Figure 1).

The mismatch goes beyond flow rates.

The IEA release is directed at IEA member countries, which do not include some of the economies most exposed to the disruption, such as Pakistan and India, which receive none of the release directly.

China built up substantial strategic reserves through 2025 and early 2026 but has shown no indication of drawing them down.

India is relying on Russian crude in floating storage following a US sanctions waiver, but only 8.0 million barrels are left.

There are still about 34 million barrels of Iranian and 21 million barrels of Venezuelan crude in floating storage, most of which is expected to head to China (Figure 2).

Another crucial variable that explains why prices have not moved further is the length of the supply chain.

The Strait of Hormuz throughput has been lost for nearly four weeks now, but global oil arrivals only showed the first meaningful decline last week, of about 7.0 million bpd below the three-year average.

For the first three weeks of the disruption, oil arrivals were largely unaffected.

The cascading supply chain implications of a sustained shortage are structurally similar to what Covid-19 did to demand in 2020 – but operating from the supply side and with less policy flexibility to respond.

The pipeline of barrels already at sea, in combination with floating storage, SPR releases, and the spare production capacity, have collectively provided a buffer that is now being exhausted in real time.

From this week, every day matters.

Before the Brent crude flat price reacts, the physical markets are the canary in the mine, and differentials are now starting to move as European buyers realize that they will face fierce competition from Asian refiners for Atlantic basin barrels.

What the Brent flat price is not saying

The Hormuz supply disruption is not affecting all market participants equally.

The vast majority of the barrels lost are medium-sour and the regional exposure is located East of the Suez Canal, with 70–80% of pre-war flows heading that way, while the products exposure is more distributed.

The closure also has a temporal asymmetry, as it affects more prompt barrels than deferred barrels.

As such, it should not be a surprise that the ICE Brent, which is a cash-settled contract two months forward pricing Atlantic Basin light-sweet crude, has had a more muted reaction than Dubai/Oman, which are physically delivered futures for medium-sour crude mostly headed to Asia.

Neither should it be surprising that the physical market, pricing the current month, is waking up in a way that cash-settled paper futures have not fully reflected.

European differentials – West African grades, Black Sea, and North Sea – moved materially higher last week.

While the Forties grade remains somewhat constrained by the competitive pressure of cheap US WTI crude landing in Europe, the broader direction of physical differentials is unambiguously higher and accelerating.

Mediterranean refiners are being progressively cut off from Saudi supply and are competing directly with Asian buyers for Atlantic Basin barrels.

That competition is only beginning to show up in physical differentials and it has much further to run.

WTI and Latin American grades are currently the cheapest crude in the world on a delivered basis, with SPR releases adding crude to an already well-supplied US Gulf Coast.

This reflects a key structural development: the potential for the US to decouple from global oil prices.

WTI is already at its widest discount to Brent in 11 years.

If the US administration moves toward export controls or bans on refined products – a policy option that is being actively discussed as President Trump faces domestic inflation pressure ahead of the mid-term elections later this year – it would cement the bifurcation between US and global oil prices.

Such a development would bring US consumers temporary relief, while Europe and Asia would get added pressure.

The central bank of oil

For decades, Saudi Arabia has earned its reputation as the central bank of oil by maintaining substantial idle production capacity – expensive to build and expensive to keep, but available to add barrels to the market when needed. That capacity is being tested right now.

The East-West pipeline connecting the country’s Eastern Province to Yanbu on the Red Sea has a theoretical nameplate capacity of up to 7.0 million bpd.

Yanbu loadings have hit a five-day rolling average of around 4.0 million bpd over the past seven days, an indisputable all-time high.

However, there is no evidence that sustained flows above 4.0 million bpd are technically achievable given the current port infrastructure and loading constraints, and with congestion rising.

Rystad Energy estimates that Iraq has halved its output, while Kuwait and the UAE have each recorded declines of around one-third.

Even Saudi Arabia, typically the most operationally resilient producer, is facing a 13% reduction relative to January’s supply level of 10.1 million bpd (Figure 3).

Collectively, we estimate that production has fallen below Covid-19 troughs, with losses reaching a peak of 10.0 million bpd – a number that dwarfs anything the IEA release can offset on a sustained basis.

There is no clear timeline for a return to normal production levels, and US efforts to secure multilateral participation in reopening navigation through the Strait of Hormuz have so far not been successful.

The global oil market has not only lost supply.

The closure of the Strait of Hormuz has also curtailed the market’s ability to react to another shock, as virtually all the spare production capacity is located in the Persian Gulf – inside the Strait.

Before the outbreak of war, the core OPEC group of four producers held crude spare capacity of around 5.3 million bpd, with Saudi Arabia accounting for about 2 million bpd, the UAE for 1.7 million bpd, Iraq for 900,000 bpd and Kuwait some 700,000 bpd (Figure 4).

Outside the Persian Gulf, the only country with ample spare capacity is Russia, whose volumes are affected by policy-driven production cuts but physically recoverable on a shorter timeline if commercial conditions allow.

Russian Urals crude has already flipped from a $12 per-barrel discount to a $4 premium over North Sea Dated in recent weeks, reflecting the pace at which buyers have absorbed available Russian supply.

That pressure valve is being exercised at near-maximum pace, but it has limited additional capacity.

From inventory buffers to demand destruction

The market eventually finds its way to balance.

For the past four weeks, buffers such as crude-on-transit, floating storage, SPR releases, and pre-war surplus have absorbed the gap and kept the market functional.

That phase is ending.

The next adjustment mechanism is demand.

With our base case assuming an optimistic resumption of flows by mid-April, we are forecasting global cuts in refinery runs at nearly 4.0 million bpd for March and 3.3 million for April, with the Asia-Pacific and Middle East/North Africa regions down by about 2.0 million bpd each (Figure 5).

This drop is partially offset by Europe, which is running harder on cheap Atlantic Basin crude.

In addition to lower crude demand, total liquids demand for April 2026 has also been revised down by more than 3.0 million bpd between the pre-war February forecast and our latest update.

But 4.0 million bpd run cuts against a 10.0 million bpd of supply loss leaves a gap that inventory buffers can no longer bridge.

The events back in 1979-80 can illustrate the situation: when inventories ran out after the sequential Iran and Iraq shocks, demand destruction triggered by surging prices did the remaining clearing work, and it required a recession to finish the job.

The 2008 demand shock followed the same logic in reverse.