Oil markets lose direction as war breaks pricing system

The war involving Iran has triggered a severe disruption in global oil markets, exposing a historic breakdown between physical crude prices and futures benchmarks—undermining one of the world’s key pricing systems, as a recent analytical article by Reuters states.

The crisis began after Iran effectively closed the Strait of Hormuz following U.S.-Israeli strikes in late February, cutting off nearly 20% of global oil flows. Gulf producers were forced to shut in around 9 million barrels per day, with total supply losses exceeding 600 million barrels. Shortages first hit Asia and are now spreading into Europe.

While Brent crude futures surged to $118 per barrel in March before stabilising near $100, physical markets show far tighter conditions. Dated Brent has risen to about $120, and some grades briefly approached $150, signalling acute supply scarcity. The gap between futures and physical prices is now the widest on record, even larger than during the COVID-19 shock.

This divergence is partly structural: futures prices for oil months ahead reflect expectations that the crisis will ease. Markets appear to be betting on a near-term resolution, but this contrasts with reality, as restoring disrupted supply could take months or longer.

The mismatch creates significant risks. Policymakers and institutions such as the IMF are relying on futures-based signals that may understate the severity of the crisis. Meanwhile, refiners are losing the benefit of cheaper pre-war crude, with margins tightening and output cuts becoming more likely.

If disruptions continue into peak summer demand, futures markets may face a sharp upward correction. This could trigger a sudden rise in energy costs, affecting inflation, growth and industrial activity.

Ultimately, the crisis is not just about lost supply—but about the loss of reliable price signals, leaving the global economy without a clear benchmark.

By Tamilla Hasanova