Strange Times Afoot in Global Oil Markets

Oil has swung from a war premium to ceasefire calm to renewed conflict and back again in the space of five months, wrong-footing forecasters at every turn. Understanding what’s driving the chaos arguably matters more than picking a side on where the oil price goes next. 

An Ongoing Rollercoaster Ride 

If you feel like oil prices have stopped making sense this year, you’re in good company. Even the world’s top oil analysts have been wrong-footed in the past months.  

Since late February, global crude has been through a war shock, a record-breaking coordinated reserve release, a ceasefire selloff that erased most of the gains, and then a fresh escalation that pushed prices straight back up again. And now there’s renewed talk of peace which is leading to lower prices. 

Brent crude has traded anywhere between the $60s and above $110 a barrel since March. That’s an extraordinary range for a market that usually moves in dollars, not tens of dollars, over a similar stretch.  

Oil price volatility like this affects all investors. It flows through to global investment markets via energy sector earnings, petrol prices, inflation expectations and the Reserve Bank's calculus, all of which have real portfolio consequences. 

A Market that Keeps Changing its Mind 

In a nutshell, the conflict between the United States, Israel and Iran that escalated sharply from late February 2026 is at the heart of the volatility.  

After the US and Israel launched strikes on Iran on 28 February, Iran's Revolutionary Guard Corps formally closed the Strait of Hormuz on 27 March. Roughly a fifth of global oil supply normally transits that narrow chokepoint between Iran and Oman, and ship-tracking data from Kpler showed transit volumes fell by 92% almost overnight. 

That was effectively Armageddon in oil market terms. 

The closure forced Saudi Arabia, the UAE, Iraq, Kuwait, Iran and smaller Gulf producers to shut in a cumulative 11.5 million barrels per day, more than 11% of global supply at the disruption's peak.  

Limited crude continued reaching markets through workarounds such as Saudi Arabia's East-West pipeline, but nowhere near enough to offset the shortfall. 

Oil-producing countries responded at a scale rarely witnessed at a global level. On 11 March, the 32 members of the International Energy Agency agreed to a coordinated release of 400 million barrels of oil from strategic reserves, the largest in the agency's history, with the US contributing 172 million barrels.  

Even with that supply increase, the effective daily supply shortfall still ran to 8.5 million barrels a day by late April, which was partially absorbed through drawing down inventories and demand destruction in fuel-scarce economies, mostly in Asia and Africa.  

By mid-June, Washington and Tehran had signed a memorandum of understanding aimed at ending the conflict and reopening the Strait. Brent slid to $78, its lowest since early March, as traders front-ran a return to normal shipping. 

The calm didn't last though.  

By mid-July, the ceasefire had collapsed. The US launched fresh strikes on Iran, reinstated a naval blockade of Iranian ports, and revoked sanction waivers that had allowed limited Iranian oil sales, while Iran's Houthi allies in Yemen declared a maritime embargo against Saudi Arabia.  

Brent surged back above $88 by the end of July as a result. 

Attacks near Russia's Black Sea export infrastructure added a second, unrelated source of supply anxiety. 

All the while, global crude oil exports have hit a post-pandemic low, which is indicative of an extremely tight market. 

What makes the past few months genuinely unusual is how repeatedly the market has tried to price in a geopolitical resolution, only to be wrong-footed time and time again.  

That in itself is an important lesson for investors. 

Why the Disruption Keeps Outrunning Market Expectations 

Part of the difficulty is structural.  

Even a partial reopening of the Strait doesn't instantly restore flows. Insurance costs, crew willingness to transit a warzone, and the logistics of restarting shut-in wells all take time.  

Yet, oil futures curves have a tendency to rapidly price in market normalisation. 

That’s effectively a mispricing of the historically strong inverse relationship between oil inventories and price.  

There's also a demand-side wrinkle to factor in, which is rarely discussed in the mainstream media.  

JP Morgan estimated April alone saw 4.3 million barrels a day of ‘forced’ demand destruction in import-dependent economies that simply ran short of fuel. That’s a very different dynamic to demand falling because of a slowing economy. 

Key Investor Takeaways 

• The energy sector remains the main beneficiary.  

The energy sector has been the standout beneficiary of higher, sustained crude prices. It’s shown the inverse relationship you’d expect: sharp falls on diplomatic progress and rallies when tensions resurface. 

For example, Woodside Energy has gained over 35% year to date, helped by its Scarborough LNG project nearing completion, with first cargo targeted for the December quarter.  

Santos has posted similar gains, aided by its diversified production base spanning Australian LNG and, following first oil from its Pikka project, Alaskan crude.  

Regardless of your short-term view, the case for energy exposure arguably remains compelling longer term. It rests upon the combination of unusually low oil inventories, constrained supply growth, and solid demand growth, with the AI rollout adding new growth drivers. 

• Impact of higher fuel costs on the RBA’s next move.  

Higher crude flows through to the bowser with a lag, and Australian households have felt it.  

The Reserve Bank now faces a two-sided problem: underlying inflation surprised to the downside in the June quarter, prompting Goldman Sachs to abandon its forecast for a further rate rise, yet the bank has flagged renewed Middle East escalation as an upside risk through oil-sensitive prices.  

The upshot is that the path for cash rates from here is more contested than it looked mid-year. 

A Hard Call 

Investors who prepared their portfolios for a chokepoint reopening, a ceasefire holding, or the war ending on schedule have been wrong more often than right this year.  

The more empowered response is to prepare your portfolio to thrive whichever way the war in Iran breaks.