Crude oil is repricing everything, but this is not a simple replay of 1973. Here’s what investors need to understand now.
KEY TAKEAWAYS
Crude oil has become the dominant macro driver at the end of Q1, triggering repricing across equities, fixed income, and commodities. Energy is now a primary input into market direction rather than a secondary variable.
The International Energy Agency has identified the current situation as the largest oil supply disruption on record. The scale of exposure exceeds prior crises in 1973, 1979, and 1990.
Approximately 20 million barrels per day typically flow through the Strait of Hormuz. After accounting for rerouting capacity, the effective supply disruption is closer to 9 million barrels per day.
Oil futures are in backwardation, indicating elevated near-term prices with expectations of lower prices over time. The curve reflects short-term supply stress without a fully permanent structural shift.
The Federal Reserve is constrained by competing risks of inflation and labor market weakness. This limits its ability to respond effectively to an energy-driven shock.
MY HOT TAKES
The current oil shock is historically large, but it does not automatically translate into a full worst-case supply collapse. The difference between exposure and realized disruption materially changes the outcome.
Markets are more reliable than headlines in pricing risk. The oil futures curve is signaling temporary stress rather than a permanent structural break.
Oil-driven inflation moves quickly through the real economy. It impacts consumers, corporate margins, and earnings expectations far faster than most investors anticipate.
The Federal Reserve is not positioned to offset this type of inflation shock. Supply-driven energy spikes fall outside the Fed’s most effective policy tools.
Understanding the structure of the disruption is critical. Transit risk, rerouting capacity, and futures pricing determine outcomes more than headline narratives.
You can quote me: “To be clear, it’s still the largest disruption in recorded history by a considerable margin.”
Oil roil. We are rapidly approaching the end of Q1, and it has been quite an interesting one at that. One, which very few of us could have predicted as we digested our Thanksgiving turkeys just a few short months ago back in November. Since then, there have been quite a few twists and turns–and that is putting it lightly. Ones which warrant amplification and clarification. While most of my colleagues on the street are right now hunkering down preparing their quarter-end reports, I decided–today at least–to focus on one which has obviously dominated this quarter, and is likely to dominate the next…and the one after that. But will it?
If you didn't already guess my topic from my tagline, I am, of course, referring to the eye-watering spike in crude oil resulting from the war in Iran. The price leap is at the center of a painful repricing of assets across the entirety of capital markets. Stocks, bonds, commodities–everything.
How are your nerves right now? Are you concerned about filling your car with gas? Are you stressed about your grocery bill? These are just the tip of the very sharp spear we are all staring down right now. Meanwhile, our Knight In Shining Armor–the Fed–has bowed out of this joust. It cannot decide which colors to take up–inflation or a decaying labor market. It has instead decided to sit this one out. That leaves us all glaring at crude oil prices, presidential Tweets, and ominous headlines from that first moment we stare at our smartphones in the morning, throughout the day, and all the way to the last glance we take at night. Guys, this one's on us to figure out, and it isn't an easy task.
We all understand that when crude goes up, so do prices at the gas pump. We also have some inkling that fuel prices can have price implications far beyond our gas budgets. The world still runs on fossil fuel–sorry for the reality check. 🙇 Crude is in literally everything you buy, one way or another. Most of my loyal regulars can vividly remember those long gas lines in the 1970s as well as the chest-grabbing inflation that gripped the country. We survived that, but we certainly don't want to re-live it–none of us.
This past week, I saw a headline which caused me to stop and mutter an "oh boy" under my breath. I even referred to the ominous headline in one of my videos. It was a quote from the IEA–the International Energy Agency.
The IEA called this "the largest supply disruption in the history of the global oil market." Not the largest in a decade. Not the largest since the Gulf War. The largest. EVER! In the entire recorded history of global oil markets. Now before you put your phone down and start burying canned goods in your backyard, let me do what I do–let me put some actual numbers behind that statement, because context here is everything, and the headline, while technically accurate, does not tell the complete story. Pay attention.
Let's go back to 1973. Most of you know the broad strokes–Arab oil producers cut off exports to the United States in response to American support for Israel during the Yom Kippur War. Lines around the block at gas stations. Nixon on television asking Americans to turn down their thermostats. Inflation that didn't just sting–it literally restructured the entire American economy. That crisis removed approximately 4.3 million barrels per day from global supply, which is roughly 7% of everything the world was consuming at the time. It was a genuine shock, and it preceded one of the most painful recessions in postwar American history. The 1979 Iranian Revolution was worse on a volume basis–nearly 5.6 million barrels per day, about 8.6% of global demand. The 1990 Gulf War knocked out another 4.3 million barrels per day when Iraq and Kuwait went offline simultaneously.
Here is where I need you to stay with me, because this is the number that made me mutter that "oh boy." The Strait of Hormuz–that now-infamous, narrow ribbon of water between Iran and the Arabian Peninsula–normally carries approximately 20 million barrels of crude oil and petroleum products every single day. That is roughly 21% of everything the world consumes. Since hostilities began on February 28th, tanker traffic through that waterway has ground to what the IEA described as a near-complete halt, with export volumes currently running at less than 10% of pre-war levels. Do the math. We are not talking about 4 or 5 million barrels per day at risk. We are talking about a theoretical exposure of 20 million. That is 4 to 5 times the scale of any disruption this planet has previously absorbed. That is why Brent crude has surged from roughly $66 per barrel before the conflict began to over $110-ish as of this morning, with a brief spike approaching $120 earlier this month. That is why California is reportedly seeing gas prices nudging $9 a gallon. That is why the IEA–an organization literally created in 1974 as a direct institutional response to the 1973 embargo–just authorized the largest emergency reserve release in its 50-year history. 400 million barrels! For context, the previous record was 182 million barrels, released after Russia invaded Ukraine in 2022. That’s right, they more than doubled it.
Now here is where I try to earn my keep, and where the picture gets more complicated than the headlines suggest. That 20-million-barrel figure is the exposure, not the realized loss. It is the worst-case scenario, not the current reality. Here is what the data ACTUALLY shows. Saudi Arabia and the UAE maintain pipeline infrastructure that can bypass the strait entirely, routing oil to Red Sea and Gulf of Oman terminals. That capacity covers approximately 5 to 6 million barrels per day. Gulf producers have also begun cutting their own output, not because they want to, but because storage is filling up with nowhere to ship it. 👀 The net supply truly bottlenecked, with no workaround whatsoever, sits closer to 9 million barrels per day, which is roughly 10% of global consumption. To be clear, it’s still the largest disruption in recorded history by a considerable margin. Still serious enough to warrant every bit of the alarm you are feeling. But meaningfully different from a literal 20-million-barrel-per-day hole in global supply, which is how some of the more breathless coverage has framed it.
There is another signal worth watching carefully, and it is coming not from analysts or headlines but from the futures market itself–which, as my regulars know, is where the smart money actually speaks. The oil futures curve is currently in what traders call backwardation–a condition where near-term contracts trade at a significant premium to longer-dated ones. December Brent futures are currently priced around $85 per barrel, roughly 23% below today's spot price. That is the market collectively saying it believes this disruption is temporary and that some resolution–ceasefire, negotiated reopening of the strait, or gradual rerouting of supply–is more likely than a permanent restructuring of global energy flows. The intense backwardation does not mean the crisis is not real. It means the market is pricing in pain now and relief later, and historically, that signal has been right more often than the panic headlines have.
Now, none of this means you should relax. The Fed is still frozen. Inflation is being imported barrel by barrel through a narrow strait that one regime controls. The IEA's emergency stockpile release buys time but the math is uncomfortable with 172 million barrels from the US Strategic Petroleum Reserve released over 120 days implies roughly 1.4 million barrels per day of relief, against a net shortfall the market is currently absorbing of several multiples of that. Every day the Strait of Hormuz stays functionally closed, the buffer gets thinner. Every ceasefire rumor followed by an Iranian denial resets the clock. The uncertainty itself is now a line item in every corporate earnings model and every household budget in America.
What I want you to take away from this is–the IEA's historic claim holds up. This IS, indeed, the largest supply disruption on record by almost any measure you choose. But the story is not simply a 1973 replay with bigger numbers. The structure of this crisis is different–it is a transit disruption, not a production embargo. A shipping/transit disruption can resolve faster than an embargo, because it requires a political agreement rather than a fundamental restructuring of production infrastructure. The futures market is telling you that! The backwardation curve is telling you that! That does not make the next 90 days painless. It makes them navigable (sorry for the big word, I couldn’t come up with a better one 😆)–if you understand what you are actually looking at rather than what the headline wants you to feel.
I get it. I watch the same news you do. I stare at the same pump prices when I drive around town, and they are not subtle. But understanding the difference between theoretical exposure and realized loss, between a permanent shock and a resolvable transit crisis, between the panic the headlines are selling and the more nuanced signal the market is actually sending–that my friends is how you stay ahead of this. That is what separates the well-informed, Malek blogpost reading investor from the bystander.
At least back in 1973 they had the decency to give us great music to suffer to. Somewhere between the gas lines and the price controls, America got Led Zeppelin, Marvin Gaye, and The Bee Gees. All we have gotten out of this one so far is more doom-scrolling and a very stressed Federal Reserve. We will get through this one too–but if somebody could put on a decent soundtrack in the meantime, I would personally appreciate it. 🕺
YESTERDAY’S MARKETS
Thursday was another rough one. The S&P 500 dropped by -1.74%, the Nasdaq shed -2.38%-- officially entering correction territory (down more than 10% from its October high), and the Dow lost 469, as Brent crude surged to $108 a barrel on fresh Iran tensions. Meta and Alphabet got hit with a double-barreled selloff, oil-driven risk-off compounded by a California jury finding both companies negligent in a landmark social media addiction case, while Micron extended its painful slide, now down nearly 20% in 5 sessions after Google's TurboQuant AI compression algorithm threatened the memory chip demand thesis.
NEXT UP
University of Michigan Sentiment (March) is expected to be revised down to 54.0 from its earlier 55.5 print.
Fed speakers today include: Barkin, Pailson, and Daly.
Next week is an abridged but a heavy one with the motherload of jobs data (including the monthly BLS data), Consumer Confidence, Retail Sales, and PMIs. You better make sure to get some rest and check back on Monday to get ahead of the curve.