On March 3, I wrote that global oil prices were unlikely to climb to $100 a barrel or higher. I got some things wrong.
First, I did not anticipate the extreme uncertainty that gripped oil markets, causing traders to speculate and pushing prices well above $100 a barrel for a brief period. I also did not expect some traders to go short and wager against higher prices, which pushed oil prices even higher when they were forced to cover their short positions.
I also anticipated a faster reaction by the administration of President Donald Trump to the spike in oil prices, which policymakers are just now taking concrete steps to reverse. It’s another reminder that markets move faster than politicians. Still, I believe my basic arguments warning against an oil price panic stand.
Yes, global oil markets are in a maelstrom. Prices for West Texas Intermediate, the benchmark for United States crude oil, have surged above $100 per barrel for the first time since 2022. In early trading Monday, WTI for next month’s delivery briefly spiked as high as $120 a barrel, a dramatic move that caught many traders off guard. Some oil traders had wagered that the conflict with Iran would be brief. They established large short positions in crude markets, betting that prices would fall once the initial shock passed. Instead, the war has dragged on, forcing those traders to scramble to cover their positions. That short covering helped propel oil prices even higher.
Yet despite the dramatic price spike, oil markets are signaling that the crisis may prove temporary. Futures prices fall sharply later in the year. While WTI for April delivery trades around $95 a barrel, prices decline to roughly $84 for July delivery and fall into the low $70s range by December. Traders expect the current disruption to ease in the months ahead.
The immediate cause of the price surge is the effective closure of the Strait of Hormuz. Iran has been using missiles and drones to target vessels attempting to transit the strait. This narrow waterway between Iran and Oman is one of the world’s most important energy corridors. Roughly 20% of global oil supply, about 20 million barrels per day, normally passes through this choke point. Oil exports from Saudi Arabia, Kuwait, Iraq, and the United Arab Emirates that typically pass through the strait have been severely disrupted. Markets are therefore pricing in the risk that millions of barrels of daily supply could temporarily disappear from global markets.
But there are also several reasons for optimism.
First, major governments are preparing to stabilize markets. France is leading discussions about military action to open the strait. The G7 nations are discussing a coordinated release of strategic petroleum reserves. The U.S. possesses large emergency oil stockpiles and is considering tapping them. Even a modest release of strategic inventories could inject millions of barrels per day into global markets and quickly ease supply pressures.
Second, producers in the Middle East have options. Saudi Arabia has already begun redirecting crude through its East–West pipeline to the port of Yanbu on the Red Sea. This pipeline alone can carry roughly 5 million barrels per day. Oil that would normally pass through the Strait of Hormuz can instead move across the kingdom and be shipped from the Red Sea, bypassing the war zone.
Third, geopolitical pressure on Iran is intensifying. China, one of the largest buyers of Iranian oil, has a strong economic incentive to push Tehran toward an off-ramp. China’s manufacturing-driven economy cannot afford sustained oil prices above $100 per barrel. Beijing also holds significant leverage because of its large investments in Iran’s petrochemical sector.
Meanwhile, the U.S. is increasing military and financial pressure on the Iranian regime. There are also U.S. contingency plans involving Kharg Island, the terminal through which roughly 90% of Iran’s oil exports flow. If those facilities were seized or disabled, Iran’s economy would face immediate collapse as the regime loses access to the hard currency needed to finance imports.
Iran is also facing financial isolation. Because Tehran has attacked ships and other facilities linked to the Gulf States, the United Arab Emirates is reportedly considering freezing Iranian financial assets held within its jurisdiction.
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The Iranian regime remains fiercely hostile toward the U.S. and Israel. But escalating economic pressure, military attacks, and diplomatic isolation are steadily narrowing Tehran’s options. The regime will choose to survive, not to commit suicide.
For now, oil markets are reacting to fear and uncertainty. But markets will soon understand that Iran will lose from a prolonged confrontation with the U.S. That reality is why, despite Monday’s dramatic price spike, the oil futures market is telling the world that Iran will ultimately blink first.
James Rogan is a former foreign service officer who later worked in law and finance for 30 years. Today, he writes a daily note on markets, economics, politics and social issues.