Every oil market model ever built had a scenario called "Strait of Hormuz closure." It sat at the extreme end of the risk spectrum — the event that was too catastrophic to be likely, the black swan that traders priced in as a tail risk but never seriously expected to see. The models said: if it happens, oil goes to $150, possibly $200. Airlines ground fleets. Recessions cascade. The global economy enters a crisis unlike anything since the 1970s.
Then it happened. And oil is trading at $110.
"I would have expected prices to be above $200. It's crazy," said Matt Smith, lead oil analyst at Kpler, when asked why prices had not gone where every model predicted. "Everyone is scratching their heads about this."
THE SCALE OF WHAT HAPPENED
Let's establish the facts first, because the numbers are genuinely staggering.
Cumulative supply losses from Gulf producers have exceeded 1 billion barrels, with more than 14 million barrels per day now shut in — an unprecedented supply shock in the history of global oil markets. Global oil supply crashed by 10.1 million barrels per day in March, due to attacks on energy infrastructure and restrictions on tanker traffic in the Middle East. Global oil output is expected to fall by 6.9 million barrels per day — 6.6% — for the full year.
It has been more than three months since the Strait was effectively blocked, creating the worst supply shock in modern history. For context, the 1973 Arab oil embargo removed 4–5 million barrels per day from global supply. This is three times that magnitude. The 1990 Gulf War removed roughly 4 million barrels per day at its peak. The current disruption is three to four times larger. And yet North Sea Dated crude plunged from a high of $144 per barrel to below $100 before rebounding to around $110 at the time of writing. Not $200. Not $150. $110. With 14 million barrels a day offline.
THE FIVE REASONS IT IS NOT $200
1. The Strategic Reserve Response Was Unprecedented
Thirty-two of the world's biggest economies, including the United States, agreed to add 400 million barrels of oil to the global market — the biggest-ever release of emergency oil stocks, led by the IEA and aimed at capping price rises. This is the intervention that the SPR was built for, and it has been deployed at a scale nobody had modelled in advance.
Goldman Sachs had modelled SPR releases of 2 million barrels per day in the first month and 1 million barrels per day in the second as a mitigation assumption — and that is broadly what has materialised. The coordinated reserve release bought time. It did not replace the missing barrels, but it flattened the immediate price spike enough to prevent panic.
2. Demand Destruction Has Been Dramatic
Global demand has slumped by an estimated 5.3 million barrels per day this quarter — the sharpest quarterly demand contraction in five years, driven by price-induced demand destruction rather than voluntary conservation. Higher prices cure higher prices. When oil moved above $120, airlines cut routes, factories throttled back, and consumers drove less. The demand response at $120 oil is not small — it is several million barrels per day of immediate consumption reduction that effectively reduces the supply gap.
3. Bypass Pipelines and Alternative Routes Have Been Maximised
Goldman's mitigation model assumed 2.6 million barrels per day of bypass capacity from Saudi and UAE pipelines — infrastructure that runs overland from producing regions to Red Sea ports, circumventing the Strait entirely. Those pipelines are now running at maximum capacity. They do not replace 14 million barrels per day of Hormuz flow, but they replace a meaningful fraction of it.
Some Iranian crude continues reaching Asian buyers through alternative routing — at steep discounts, through shadow tanker fleets, and with complex documentation. However, volumes remain wholly insufficient to offset the overall supply loss. Every barrel that moves is a barrel that reduces the net deficit.
4. The Ceasefire Premium and Negotiation Optionality
Oil prices eased somewhat in early April after the announcement of a temporary ceasefire. Since then, price movements have reflected uncertainty about the outcome of negotiations between Iran and the United States to end the conflict and restore Strait access.
Markets are forward-looking instruments. When traders price oil, they are not pricing only the current reality — they are pricing the probability-weighted future. Every time a ceasefire rumour emerges, prices fall. Every time negotiations appear to stall, prices spike. The $110 level represents a market that has assigned perhaps a 60–70% probability to the Strait eventually reopening — and is pricing that probability rather than the current closed-Strait reality.
5. The Global Economy's Structural Weakness
The sharpest quarterly demand contraction in five years reflects something important: the global economy entering this crisis was already showing signs of weakness. A global economy running at full capacity, with robust demand growth from China and India, would have absorbed this supply shock at considerably higher prices. A global economy already wobbling — with Chinese property still stressed, European industry struggling, and the US consumer showing signs of fatigue — has less demand resilience, which paradoxically caps the price response.
WHAT ANALYSTS ARE ACTUALLY SAYING
Goldman Sachs described the situation as the largest supply shock in the history of the global crude market. The bank raised its Brent forecast to an average of $85 a barrel for 2026, up from a prior forecast of $77 — while also making a structural argument that even after the Strait reopens, prices are not expected to fall quickly back to pre-war levels. The shock has forced markets to reprice the concentration of oil production in the Persian Gulf, and that risk premium is now baked into long-dated oil forwards. The IEA, assuming flows through the Strait gradually resume from June, projects global oil supply to decline by 3.9 million barrels per day on average in 2026, to 102.2 million barrels per day.
The worst-case scenarios — $154 at twelve weeks closed, $200 under severe escalation — have not materialised because the worst-case assumptions about demand response and alternative supply have proven too pessimistic. Independent analysts project prices reaching approximately $154 per barrel if the closure extends to twelve weeks, with $200 per barrel scenarios considered plausible under severe escalation conditions. Those scenarios remain live as long as the Strait stays closed.
THE INDIA DIMENSION
For India, this is not an abstract commodity market story. It is a direct fiscal and economic challenge of the first order.
China, India, Japan, and South Korea face the most acute supply shortages, having collectively absorbed between 69% and 84% of pre-conflict Hormuz oil volumes under normal trade conditions. India imports over 85% of its crude requirements, with Gulf sources accounting for a dominant share. At $110 oil — which is where Brent currently sits — India's import bill for the year will be dramatically higher than budgeted, the current account deficit will widen materially, and the rupee faces persistent depreciation pressure.
The government has several options — reducing fuel taxes, tolerating higher inflation, drawing down the fiscal buffer built from lower oil prices in 2024–25, or accelerating the domestic exploration programme that the Andaman discoveries have reinvigorated. None of them are easy. All of them are being debated simultaneously.
The Andaman gas discovery, reported just this week, is particularly resonant against this backdrop. India needs its own hydrocarbons more urgently than at any point in the past decade. The Strait of Hormuz crisis has provided the most forceful possible argument for domestic energy sovereignty that any government could have wished for.
THE VERDICT
The textbook said: block the Strait, get $200 oil. The real world said: block the Strait, get $110 oil — because markets are smarter than textbooks, demand destruction is faster than models assumed, and the coordinated reserve release has been executed at a scale that no previous crisis had required.
But as one analyst put it, the math still doesn't entirely math. Ignore Econ 101 for now — supply and demand can only explain so much when geopolitics is writing the equation.
What it can tell you with reasonable confidence is this: $110 oil with 14 million barrels per day shut in is extraordinary resilience by the global market. And $200 oil — the scenario that everybody modelled and nobody has seen — remains a live possibility for as long as the Strait stays closed, the ceasefire remains fragile, and the negotiations between Washington and Tehran continue to produce uncertainty rather than resolution.
The market has been impressively calm. The situation has not.
