Iran’s blockade of the Strait of Hormuz, long threatened, became fact with the U.S. attack on Iran. Removing approximately 10 million barrels per day caused consumers to bid up the price of oil that was making it market. Whether or not the negotiated MOU frames up a lasting peace, others can now manipulate the oil markets and the price: Israel, China, Russia, Saudi Arabia, and Ukraine. Let’s see how.
The global oil market totaled about 106 million barrels per day prewar. The price of West Texas Intermediate crude was $56 per barrel—Nobel winning economist William Nordhaus showed that oil prices all over the world, including the Brent price, move in lockstep. Oil markets trade almost on a just-in-time basis, with oil rapidly transported to refineries and fuel rapidly sold to consumers. Any small interruptions in supply are magnified quickly in price because consumers will bite the bullet and pay $10 per gallon if that’s what it takes to get to work and school. As calculated, the crude oil price elasticity of demand is approximately -0.047, meaning that for a 10% decline in quantity reaching the market, the crude price would increase between 200% and 250%, for a WTI price between $168 and $196 per barrel. While some spot sales of diesel at $150 per barrel and jet fuel at $200 per barrel have been reported in Northern Europe, WTI has not risen above $113 per barrel and has settled, close to $75 per barrel post MOU. Why?
First, the closely watched price of WTI is the quoted futures market price for delivery within the next month. The drop in the price of WTI when the MOU was signed occurred during trading for the July delivery contract, and the price drop certainly reflected that no traders were concerned about any refineries running short on crude oil. Of course, that crude oil will be refined into gasoline, diesel, and jet fuel for delivery to consumers in August and September.
U.S. commercial inventories first began to replace the oil removed from the market. U.S. producers and refiners began to ship directly to oil-short Asian economies during the first week of the war. These inventories in the U.S. are now well below the low end of five-year average stocks.
Direct government interventions in the global oil markets have kept the crude price below the price indicated by the elasticity calculation. The U.S. has released 172 million barrels from its Strategic Petroleum Reserve as part of a 400 million barrel release by the International Energy Agency. The blockade of the strait by Iran began February 28, 2026, and the Trump administration, along with the IEA, began to release oil from the strategic reserves on March 17. Add to this China’s decision to curtail 3 million barrels per day of imports.
The Political Economy of Oil
Is it right to anticipate a return to prewar price levels? Not yet. Allies and enemies of the U.S. can play the oil game to move the affordability discussion for the U.S. midterm elections.
The Israeli leadership has different objectives than the U.S. The U.S. consumer is not supportive of Israel at this point. Because the terms of the MOU are not economically favorable to the U.S., continued Israeli prosecution of the war will cost U.S. voters more and more.
China understands its position in the game. China could reverse its position on reduced oil imports to drive up the global price of oil and harm the Trump administration’s hopes of maintaining Republican majorities in the House and Senate. In the tit-for-tat tariffs war ignited by President Trump, driving up the price of oil may be a fair retaliation.
Saudi Arabia has become closer to Russia as a result of the U.S. war on Iran and Iran’s direct retaliation against Saudi Arabia. President Trump’s intemperate remarks further damaged America’s relationship with the leader of Saudi Arabia. It would be a simple matter for the Saudis and other nations in the Persian Gulf to slow walk a return to full production and shipping to keep the price of crude high through the election.
Russia’s war against Ukraine is also limiting oil availability in the global market with every hit against Russian facilities by Ukraine.
Where is the U.S. oil producer?
The on-again, off-again prospect of peace and a lower oil price does not encourage investment by domestic oil producers. The rig count is only marginally higher year over year. Prior to the war, the oil and gas sector had been the worst performing sector in the stock market for more than a decade, and a four-month war does not justify changing five-year investment plans. Add to this the Trump administration’s decision to compete directly with the domestic oil industry by releasing oil from the SPR—almost all of which is going to foreign buyers—and it appears that Billy Bob Thornton’s character in “Landman” is enjoying a bonus, for now.
The CEOs of both Chevron and ExxonMobil have warned that U.S. physical inventories have dropped to such levels that WTI price increases will be unavoidable. Even unprecedented.
The war on Iran has kicked off a broader game in the global oil market that is far more important to U.S. voters than the World Cup. Unfortunately, the loser in this game is already apparent. Stay tuned to see who makes the next moves!
