THE TWO DANGERS OF HORMUZ THAT KEEP ENERGY MARKETS IN TURMOIL - Filenews 3/4
By George Calhoun
The narrative of economists is that the price of gasoline is shaped by the balance of supply and demand at a given time – the "spot price". But the supply of gasoline in the U.S. hasn't changed, and inventories are plentiful. Demand (consumption) remains stable. There are no shortages, no queues at gas stations. Unlike in the 1970s, when the US imported energy, today it produces much more than it consumes and exports the rest. In fact, the U.S. is the world's largest exporter of gasoline, a "safety cushion" from price fluctuations — or so it should be.
Something else is moving the energy markets – right now the price at the pump is based on the vague phenomenon that traders call "risk". It comes from the Strait of Hormuz in the Persian Gulf. When the war broke out, the market suddenly stopped pricing gasoline as a commodity and started pricing risk, buying and selling risk, "shorting" risk, hedging risk – where the word "risk" encompasses a mix of future scenarios involving different profits or losses, different time frames, and chances of events happening on the other side of the world.
The problem is that the term "risk" is vague. There are many different scenarios for the future that are currently being incorporated into the purchase price of oil. Some scenarios are much more important than others and are influenced differently by external factors. As with all tradable assets, some of these elements of "risk" are excessive... overvalued or undervalued. In any case, the "game" in the global energy markets at the moment is about analyzing, understanding and diversifying the components of the risk caused by the Hormuz crisis.
The impact of the war
The US and Israeli attack on Iran, which began on February 28, sent shockwaves to energy markets and caused a sharp rise in oil and gas prices.
Obviously, someone will answer. Do energy prices always soar when war breaks out in the Middle East? And for good reason, since 20-25% of global exports of crude oil and liquefied natural gas (LNG) pass through the Strait of Hormuz. If this flow is interrupted, it goes without saying that prices will rise.
But why is it obvious? Consider this: many economists, and most financial theorists, generally agree on two things:
– the price of a tradable asset at any given time is the result of the market mechanism that balances supply and demand for that asset; This is the principle of self-regulating equilibrium, which is considered an intrinsic characteristic of a market that functions smoothly (i.e., with high liquidity)
– the price of an asset is an accurate measure of its value; This is the efficient market hypothesis, which argues that the price fully reflects all available information that could affect the intrinsic value of the asset, eliminating the possibility of undervalued or overvalued assets
Financial professionals reject both of these ideas. They observe from their experience that markets are very often in a state of imbalance. They also reject the idea that prices are always accurate indicators of value. There are assets that are quite undervalued or overvalued – a condition that is the driving force behind trading anyway.
So what if today's energy prices did not reflect current supply and demand conditions? What if prices were not measures of value, but something else?
The "cushion" of oil
For the global market, the current interruption (or slowdown) of the flow through the Strait of Hormuz will ultimately limit supply, if it continues. However, the actual impact on supply to end-users has not been immediate. The normal transit time for tankers from the Persian Gulf to Europe (e.g. Rotterdam) or the Far East is about three weeks, not counting the unloading time at the port. There is a "marine reserve" of oil under transport, which can be measured in two ways. "Oil at sea" includes all the crude that is currently transported in tankers at sea, while "floating storage" is the subset of this oil that has been deliberately "parked" on ships and does not move. Ships are used as warehouses and not as means of transport.
In the fourth quarter of 2025, there was a huge accumulation of "oil at sea".
"Floating storage" reached a 5-year high in December at about 150 million. barrels in December. According to estimates, it decreased to 80 million. barrels on March 19, but remaining well above the average of the last two years.
The number could be higher. On March 19, U.S. Treasury Secretary Scott Bessed estimated that sanctioned Iranian oil in floating storage amounts to about $140 million. barrels. Bloomberg's estimates raise this amount even more.
In short, the rapid rise in prices for crude and other hydrocarbon products after Operation "Epic Wrath" cannot be explained by some sudden change in immediate demand or supply. So what has changed?
Assessing Risk
Investors have an explanation. In their view, the market does not value a balance of supply and demand. It assesses the "risk".
And this is not easy to do. Risk is one of the most challenging concepts in finance. It involves two phenomena that are not equivalent. Risk implies an effect on the value of assets, usually with negative consequences (the "risk" of a loss or an increase in costs). But in financial theory, risk means volatility. Volatility and value intersect, especially when leverage is involved. A volatile market can force the liquidation of a hyper-leveraged position, causing a loss.
A normal price formulation process absorbs new information and seeks to quickly find the new equilibrium point, balancing supply and demand.
However, the risk assessment in the energy market after Hormuz was chaotic.
The apparent collapse of leveraged short positions on March 8/9 led to an apparent squeeze on short positions. The price of Brent jumped, fell and then strengthened again with a large trading volume.
Spreads between buy and sell prices in the oil market widened from a few cents to as much as $10 a barrel.
Volatility has skyrocketed — three times the long-term average.
Overall, the pricing process appears to be experiencing difficulties. It gives the impression of a struggle between opposing views on the risk profile.
Two types of danger in the Strait of Hormuz interacting
The market is trying to assess—that is, quantify—a set of complex economic, political, geopolitical, and, of course, military uncertainties. In normal conditions, the energy market realizes a fairly simple matching of supply and demand, and prices are reasonably stable. The product is a basic commodity; demand is inelastic; Markets are global and well-integrated. Buyers and sellers are experienced operators. This creates a smooth system, most of the time.
However, in the language of finance, the global energy picture has become "high-dimensional", "there are a huge number of factors and variables that interact with each other and affect the values of financial assets/instruments". The natural goal and function of a market is to "reduce dimension" to a large extent, resulting in the one and fixed price. However, uncertainties have multiplied and overwhelmed market mechanisms.
Shehriyar Antia, an economist at the Global Insights Center, divides risk in the oil and gas markets into two components:
– Production risk: Whether the facilities in the Persian Gulf are able to operate, export, process and load the oil and gas into the supply channel, and
– Transport risk: Whether oil and gas can be transported, through the Strait of Hormuz, or by other means.
The production risk mainly concerns military scenarios and the risk of material damage to sensitive industrial facilities. The Iranian missile attack on the Qatar LNG plant in Ras Lafan on March 17 reportedly caused damage sufficient to reduce the plant's production capacity by 17%, which led to the closure of the entire plant and the halt of Qatar's LNG exports – about 20% of the world's supply. So far, this is the only significant and permanent reduction in production capacity in the region (excluding the damage to Iran's energy infrastructure, which is more difficult to assess).
– The risk of transfer is centred on the closure of the Strait of Hormuz, which has a diplomatic and geopolitical dimension, in addition to a military one. Before the war, about 20 million barrels a day passed through Hormuz. Today, very small volumes (~1 million barrels?) manage to pass. And if oil cannot be transported or stored, part of the production must be limited. The International Energy Agency estimates that Gulf producers have withdrawn 10 million barrels of barrels per day from the market. Compensatory measures partially compensate for these losses. The Saudi pipeline has reportedly increased its carrying capacity to 7 million barrels per day, while producers outside the Gulf have increased production by 2-3 million barrels per day. However, the global deficit due to transportation problems through Hormuz is estimated to be in the range of 8-10 million barrels per day.
Both risk factors are very serious. However, they differ in their impact on the recovery after the end of hostilities.
The risk in transport is expected to start receding as soon as hostilities stop. Today, 80-100 million. barrels of "blocked oil" are found on tankers that have taken refuge in the Gulf – which could sail very quickly after a ceasefire is reached. Restoring idle capacity will take a few more weeks. Much of the "deferred" sales will take place, and higher-than-normal prices in the near future could soften the economic impact on producers. With the restoration of transport activities, Goldman Sachs predicts in the "base scenario" for oil prices to reach $70 per barrel this year.
The production risk is different. The timeline for restoring Qatar's LNG facilities to full production capacity will be much longer.
For now, apart from Ras Lafan, the risk from this war seems to lie mainly in the transport category, where the favourable prospect of a quick recovery will likely hold prices down. However, the threat of escalation could amplify the risk in the production category – which may increase as Iran is pushed into an increasingly desperate military situation. This is a factor that favors persistent volatility, which in turn disrupts the price formation process.
