Market Pricing Assumption May Prolong Middle East Conflict

The global crude oil market is pricing in an early resolution to the conflict in the Middle East, which would allow for the full re-opening of the Strait of Hormuz. However, this assumption may be self-fulfilling, as it provides U.S. President Donald Trump with room to continue the conflict.

The market is pricing crude oil futures at around $111.81 a barrel, up 54% since February 27, when the U.S. and Israel launched an aerial campaign against Iran. This is lower than the price spike seen in 2022, when Russia invaded Ukraine and Brent spiked to $139.13 a barrel.

The key difference between the two situations is that the Russian invasion did not result in a significant loss of supply of crude and refined products, whereas the current conflict has already led to the closure of the Strait of Hormuz, resulting in a loss of 12 million barrels per day of supply.

Experts warn that the market's assumption of an early resolution may be a Catch-22, as it makes it more likely for Trump to continue the conflict. The lack of alignment among major players, including the U.S., Israel, Iran, and Russia, increases the risk of the war continuing and even worsening.