The Iran war has torn open a dangerous rift in global oil markets: physical crude is trading at record highs while futures benchmarks signal calm. That disconnect is forcing consumers, companies and policymakers to navigate without a reliable compass - and it could leave a lasting scar on the global economy.
Investors have struggled to price the unprecedented disruption to global oil supplies since Iran effectively closed the Strait of Hormuz following the US-Israeli strikes on February 8.
The blockade has cut off nearly a fifth of global oil flows, triggering acute supply shortages in Asia and, increasingly, in Europe and forcing Persian Gulf producers to shut in around nine million barrels per day (bpd) of production.
Global benchmark Brent crude futures surged 64 per cent in March, setting a record monthly gain, to a peak of $118 a barrel. Prices then fell back to around $95 after the US and Iran agreed to a ceasefire on April 7.
But after the failure of talks to end the war, US President Donald Trump on Monday imposed a blockade on ships entering and exiting Iranian ports and coastal areas, pushing prices back up to around $100.
Those moves may appear extreme, but given the sheer scale of the actual supply losses – now topping some 600 million barrels – they look surprisingly restrained.
Indeed, prices paid by refineries for oil needed to make products such as gasoline, diesel and jet fuel have reacted far more forcefully. Dated Brent, which refers to the price of physical crude delivered to northwest Europe, is trading at $120 a barrel - about 65 per cent above pre-war levels and the highest since 2022.
Other physical benchmarks have surged to record highs. North Sea Forties crude briefly hit a peak of nearly $150 a barrel on Monday. All this points to an acute supply shortage.
The current disconnect between paper and physical Brent is as wide as it has ever been – even compared with the depths of the Covid-19 pandemic, when global oil demand collapsed by around 20 million bpd as economies shut down.
This disparity is baffling many traders and analysts. Technical factors explain part of the divergence. Brent futures reflect barrels delivered roughly two months forward, while Dated Brent is used for oil loading within 10 to 30 days.
In short, the gap simply shows that futures markets are betting on a rapid easing of the crisis. One explanation for this optimism is the widespread market belief – or hope – that Trump will avoid prolonging the conflict for fear of driving US gasoline prices sharply higher.
Relatively ample global inventories heading into the war may also have cushioned initial concerns. But that optimism flies in the face of the reality on the ground – Middle East oil production and exports would take months, if not years, to recover to pre-war levels even once Hormuz is fully reopened.
If oil supplies currently being priced into the futures market fail to materialise by early summer - the peak demand period in the northern hemisphere - the misalignment within the Brent complex will only expand – with broad consequences for the global economy. A breakdown in Brent futures pricing - the bedrock of global oil markets - risks distorting the economic decisions of governments, companies and consumers worldwide.
Policymakers appear to be hedging their bets. On Tuesday, the International Monetary Fund raised its base-case forecast for 2026 oil prices by 30 per cent to $82 a barrel compared with its previous forecast in January. It simultaneously cut its global growth forecast for this year by 0.2 percentage point to 3.1 per cent.
That looks far more aligned with what the oil futures market is signalling than with the facts on the ground. The shape of the futures curve suggests oil prices in the coming months will remain well within the recent historic norm. But, once again, the physical world tells a very different story.
While oil feedstock prices skyrocketed last month, logistical realities have thus far limited demand destruction among refiners. Because of shipping delays, many refineries were still processing pre-war feedstock cargoes last month, meaning they were paying lower prices while selling refined products at inflated levels, generating windfall profits.
While some Asian refiners throttled back early in the conflict to conserve inventories, the positive economics meant that much activity continued unabated.
That cushion has now largely disappeared, however. The last feedstock cargoes that left the Middle East before the blockade have been absorbed in Asia, which relies on the region for about 60 per cent of its crude imports, and in Europe.
Refining margins are thus compressing rapidly, raising the likelihood that plants will soon cut run rates significantly or shut units altogether, causing a pronounced drop in economic activity that could take many by surprise.
Energy prices also impact governments’ inflation calculations – even if central banks are expected to look through short-term energy price shocks – and distorted market signals may cause policymakers to avoid taking necessary actions or to take the wrong ones.
The steep Brent forward curve also complicates hedging strategies for airlines and other fuel-intensive businesses, potentially adding further costs or discouraging risk-taking altogether, further weighing on economic output.
Ultimately, what makes this crisis especially dangerous is not just the loss of oil, but the loss of clarity.
When physical barrels trade at $150 while futures imply relief around the corner, consumers, companies and policymakers are forced to navigate without a reliable compass.
That leaves them especially vulnerable if the Hormuz disruption drags on and the futures market is forced to abandon its optimism and reprice violently, upending global economies along the way.
(Ron Bousso; Editing by Marguerita Choy)
