Brent crude looks manageable at about $104 a barrel, and shipping through the Strait of Hormuz has recovered to roughly 80% of pre-war levels. But physical oil prices, freight costs and diesel margins tell a far more worrying story.
Think of an old lorry grinding up a steep hill on a hot day. The driver watches the temperature gauge, but the radiator may not be the first thing to fail. It could be the fan belt, or a cracked tyre. The global economy is in a similar position after seven months of conflict in the Gulf.
Most people judge the war by two simple numbers: the Brent crude futures price and the Iranian rial’s exchange rate. The strain on the system is likely to show up somewhere else.
Why the Brent price misleads?
Brent futures closed last week at $104.57 per barrel for the front-month contract. That is high, but not alarming enough to unsettle most macroeconomists. And the news from the Strait of Hormuz has been better lately. Crude flows have been rising for weeks, helped by three things:
- a US naval escort operation,
- increasingly effective shuttle runs by the national shipping lines of the Gulf Cooperation Council (GCC) states,
- some very bold tanker operators.
Headlines have declared that the US “won the battle of Hormuz.” Overall oil flows from the Gulf are now about 80% of pre-war levels, compared with around 20% at the worst of the fighting in March and April.
That optimism hides a lot, and it breeds complacency.
What recovery has actually cost?
The recovery has taken seven months and enormous resources. About a third of the US Navy is tied up around the Gulf. Attacks on tankers continue, and at least 24 sailors have been killed. Even now, transit is still running a deficit of 4.4 million barrels per day.
The picture is worse for refined fuels. Refined products and liquefied petroleum gas (LPG) are only about 60% of their pre-conflict levels. On top of that, roughly one million barrels per day of Russian diesel exports have been lost because of Ukrainian attacks on Russian refineries.
There is also a hard question about the goal itself. The strait was open to navigation on 27 February. The effort so far has been about getting back to that starting point, a first step before any of the White House’s wider war aims, such as halting Iran’s nuclear programme.
Other commodities get far less attention from admirals and analysts, though they matter just as much to the world economy. Flows of liquefied natural gas (LNG), fertilisers, petrochemicals, sulphur and helium are all still restricted.
Tehran is reading the headlines too
Weekly oil flows may even look closer to normal than the monthly figures suggest. Iran appears to have noticed. A recent run of attacks has hit ships well inside the Gulf, and one in the Gulf of Oman that was not trying to cross Hormuz at all.
Tehran also has other ways to spread the pain. Its allies, the Houthis in Yemen, could carry out more strikes. Its proxies in Iraq could target Saudi refineries and the crucial east-west pipeline.
The deficit has to show up somewhere
Before the war, estimates pointed to a large market surplus this year, perhaps as much as 2.8 million barrels per day. That cushion is gone. Output outside the Gulf has risen, and global demand would also have grown this year if the war had not intervened.
Releases from strategic stockpiles are trickling out, but they are close to running dry. Whatever deficit remains has to be closed by cutting demand, and that has painful real-world consequences.
Where the stress is already visible?
Before the war, the gap between futures and physical prices, regional price differences and the spread between crude and products were easy to ignore, because they moved together. That shortcut no longer works. The warning signs are now clear in the physical market:
| Indicator | Before the war | Now |
|---|---|---|
| Dated Brent vs futures | Closely aligned | About $19 per barrel above futures, a record |
| Freight, US Gulf Coast to China | About $5 per barrel | More than $40 per barrel |
| New York wholesale diesel | Not stated | $210 per barrel |
| Shell refining margin | Just over $10 per barrel (last year) | $24 in Q2, $42 in Q3 |
Some points on what these numbers mean:
- Dated Brent is the price for physical oil with a firm delivery window. Its record premium over futures shows that buyers need actual barrels, not paper contracts.
- Futures are in steep backwardation. Prices for delivery a month or two out are well below the prompt price.
- Tanker rates have risen almost vertically since September, just as the American escort effort moved into high gear. Long voyages from the US to East Asia, damaged vessels leaving the fleet, and the inefficiency of shuttle runs and ship-to-ship transfers have all added to costs.
Diesel: where the squeeze is sharpest
Diesel shows the pressure most clearly. Refining margins at Shell have more than quadrupled in about a year. Yet even with margins this high, some refineries could struggle, because imported crude is so expensive once shipping is included.
Stock releases offer little relief
The G7 agreed to release more strategic stocks under pressure from President Donald Trump. The analysis behind this report is sceptical, calling it mostly a PR show.
The International Energy Agency (IEA) says it will speed up withdrawals and front-load them with diesel. But the 100-million-barrel figure is part of the release already announced in March, not new supply. The analysis also reads Trump’s publicising of an alleged promise from President Vladimir Putin to provide a couple of tankers of diesel as a sign of desperation.
The economy is holding, for now
The global economy is still running reasonably well, helped by the continuing boom in AI investment, which may not last forever. As long as activity stays strong, oil demand will too. Lower prices are possible, but only at the cost of a weaker economy.
Central banks face a similar trade-off. Raising interest rates to control inflation would also slow growth.
Inflation and bond yields are already moving
The effects are visible in the US. Inflation has risen to 3.4%, up from 2.7% last year. The 10-year Treasury yield stood just below 4% when the bombers took off on 28 February. It is now 5.23%.
Those figures look small next to Iran, where inflation reached nearly 90% last month. Discontent is also growing over the “trustees” who were supposed to sell the sanctioned country’s oil but who appear to have kept much of the proceeds.
What it will take to end the war?
For the war to end, or even to cool, Iran’s new leadership would have to conclude that the economic damage threatens its hold on power. Showing weakness would invite Washington to increase pressure, or at least to keep strangling Iranian oil exports.
That is the core risk of watching only Brent. Looking at the wrong numbers leads to complacency, keeps the stalemate going, and raises the chance of a return to full-scale fighting.
FAQ
Why is the Brent price not a full guide to the oil market?
- Brent futures reflect the contract price, not the cost of getting physical barrels to buyers. Dated Brent, freight rates and product prices show the real strain, and they have moved far more than futures.
How much oil flow has recovered through the Strait of Hormuz?
- Overall Gulf oil flows are about 80% of pre-war levels, up from around 20% at the worst point in March and April. A deficit of 4.4 million barrels per day remains.
What is Dated Brent?
- It is the price for physical crude with a definite delivery window. It is currently about $19 per barrel above futures, an all-time record.
Why is diesel so expensive?
- Refined product flows are only about 60% of pre-conflict levels, and about one million barrels per day of Russian diesel exports have been lost to attacks on Russian refineries. New York wholesale diesel is $210 per barrel.
Will strategic stock releases fix the shortage?
- The analysis is doubtful. The IEA’s 100-million-barrel figure is part of the release announced in March, and stockpiles are close to running out.
