Oil is causing all sorts of jitters. And the markets are responding in kind.
Crude prices are surging like we have not seen since the 1970s. The kind of volatility is unseen and unheard of in recent times. The Iran war is now a direct threat to production and shipping.
Tanker traffic through the Strait of Hormuz is at a virtual standstill. Brent crude briefly surged to nearly $119.50 a barrel before pulling back, while U.S. benchmark crude also rose.
That goes to show how rapidly traders can add a “war premium” to energy prices when supply routes look vulnerable.
There are no two ways about it; we are in the most severe energy crisis since the 1970s, at least in terms of price action.
But a JPMorgan (JPM) view making the rounds is providing much-needed context and nuance to the situation. According to the astounding view, we are pricing the situation all wrong.
Some may believe that the US attacking Iran means that perhaps the US is the most vulnerable in this fight. However, according to this analyst’s forecast, it is the opposite. Europe and Asia are the most in trouble.
The reason is structural. America’s energy profile has changed dramatically over decades, and net petroleum imports are down dramatically since peaking in 2005, as domestic production and exports increased.
The catch is that even if the macro damage is limited, gasoline prices can still become a political trigger. Whichever administration is in power will need to address the situation quickly, because politics can move markets.
JPMorgan’s James Sullivan said the bank’s base case, even as oil prices swing, remains:
Photo by peshkov on Getty Images
JPMorgan says America is insulated, but Asia is not
JPMorgan’s main point is that investors need to distinguish macroeconomic effects from market and political effects. Those two will rarely move in sync.
The U.S. is far less vulnerable to an oil import shock as I write this. Think back to the panic of the Gulf War or the panic in the 1970s. You cannot compare this to any previous Middle East crises.
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The Energy Information Administration says U.S. net petroleum importspeaked in 2005 and have been going down ever since domestic production rose and exports increased. That means Americans will still feel higher prices at the pump, but the country is less exposed to imported barrels than it used to be.
It’s a different math problem when we skip a few continents. The Iran conflict has disrupted flows through the Strait of Hormuz, a major chokepoint for global oil shipments.
Reports describe ships getting backed up and Gulf producers cutting output because exports can’t move normally and storage is filling. If that persists, import-dependent economies may face tough choices. There is a narrow set of options: pay up, ration, or curb industrial activity.
That’s why this episode can feel “1970s severe” in headlines. But the issue is more nuanced at the surface level.
The U.S. may be less exposed economically, while parts of Asia could feel sharper pressure through higher fuel costs, supply-chain disruption, and growth concerns, which is why they are scrambling behind the scenes to broker a much-needed ceasefire between all parties involved.
Oil’s next move may depend on politics, not supply math
Markets don’t trade base cases; they trade probabilities. Hence, even if JPMorgan is right and the conflict remains “limited,” investors will keep coming back again and again to reprice the situation.
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At the moment, investors are primarily focusing on repricing time. What everyone is looking at is how long Hormuz remains locked up, and whether producers can keep exporting without running into physical bottlenecks.
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Reuters reported Gulf producers are cutting output as blocked routes and storage constraints collide. At the same time, world governments are discussing potential emergency measures to stabilize the market, with China emerging as a key arbiter. AP News described a similar dynamic: rising concern that transport and production disruptions could persist long enough to push oil higher if conditions get worse from here.
Domestic politics may matter as much as barrels in the US. If crude’s spike translates into higher gasoline and diesel prices, the pressure doesn’t stay on refiners and consumers. Instead, the battleground becomes Congress.
And political pressure can create the quickest “offramp”: faster de-escalation efforts, corridor security, reserve releases, or some combination of those moves.
Investors should look for two signals:
- Investors should seek confirmation that logistics are improving, such as the reopening of shipping lanes, the reduction in backed-up tankers, and a decrease in insurance costs.
- Concrete policy actions, such as coordinating emergency stock releases, announcing naval escorts, or verifying steps towards de-escalation.
Crude can fall just as fast as it rose if those signals arrive quickly. If they don’t, the “1970s shock” narrative becomes more credible, suggesting that prolonged inaction could lead to significant economic disruptions similar to those experienced during that decade.
That’s because uncertainty is what is being priced in, not just a scarce resource.
