Oil Price Puzzle: Market's Bet on Temporary Disruption Keeps Prices Low
The price of oil has remained below expectations since the start of the war between the US and Iran, despite predictions from experts that it would reach $150 to $200 per barrel. Fereidun Fesharaki, chairman emeritus of a global energy consultancy, predicted that a prolonged closure of the Strait of Hormuz would put the price at $150 to $200 per barrel within weeks.
In reality, the price peaked at $138.21 in March and then fell, with Brent averaging $94.10 over the past four months. The market's persistent bet that the Strait of Hormuz will reopen soon and durably has kept prices below what the lost volume implies, causing wild swings in prices since the war began.
The underlying reason for the lower-than-expected prices is the market's wager on a temporary disruption and a settlement near. Confidence in this outcome is skin-deep and easily upset, as realized volatility in Brent rose from 34 percent annualized before the war to over 100 percent in April.