Oil prices surged to their highest levels in years this week as ongoing tensions related to the U.S.-Iran conflict continued to rattle global markets, exposing a growing disconnect between investor expectations and underlying supply risks.
Despite the spike, analysts warn that financial markets are still largely positioned for a quick resolution to the crisis even as disruptions to critical energy routes persist.
Brent crude briefly climbed above $120 a barrel on Wednesday, its highest level in roughly four years, before easing slightly. U.S. West Texas Intermediate hovered above $106. The move followed reports that the U.S. could be preparing further military action against Iran and is maintaining a blockade in the Strait of Hormuz despite an Iranian proposal to end the war and reopen it without a nuclear deal, leaving the nuclear issue for further negotiation in the future.
The renewed volatility comes as markets continue to grapple with the implications of the ongoing standoff. Analysts say this reaction underscores a broader issue: markets may be underestimating how long disruptions could last.
A key signal lies in the structure of oil futures markets, where near-term contracts continue to trade at higher prices than those for later delivery. This pattern usually indicates expectations of tight supply in the short term but a return to more stable conditions over time. However, some investors argue this outlook may be too optimistic given the scale of the disruptions.
"There's been millions of barrels every day that haven't gotten through," Patrick Armstrong of Plurimi Group warned that the pricing suggests traders are assuming a swift reopening of shipping routes. Instead, declining inventories and tightening refined product markets point to deeper strain, he told CNBC.
Beyond crude, analysts are increasingly focused on refined products such as diesel and jet fuel, where supply chains are tightening more rapidly. Diesel prices have surged sharply in recent weeks, reflecting limited inventories and ongoing logistical bottlenecks. These pressures could take time to filter through to the broader economy.
Bill Perkins of Skylar Capital said the full impact of supply disruptions has yet to be felt, noting that it can take weeks for oil shipments already in transit to reach end users.
Other outlets have echoed concerns about the fragility of global supply. Reuters reported that disruptions in the Strait of Hormuz are drawing down inventories and raising fears of a prolonged supply crunch, particularly if the conflict extends into the summer driving season. Similarly, Bloomberg noted that traders are increasingly hedging against further volatility as geopolitical risks mount, even as broader markets remain relatively calm.
At the same time, some analysts point to potential downside risks for oil prices if a diplomatic breakthrough is achieved. A resolution could lead to the easing of sanctions on Iranian exports and the release of additional supply into the market. Strategic petroleum reserves have also been tapped in several countries to cushion the immediate impact, helping to stabilize prices in the short term.
Still, uncertainty around timing remains a key challenge. As highlighted in earlier previous coverage by IBT coverage, major banks have already raised their oil price forecasts in anticipation of prolonged disruption, underscoring the potential for sustained volatility.
