Crude oil spiked above $100 amid Middle East tensions. Here’s how that surge moves from the oil well to the gas pump—and why it may not last.
KEY TAKEAWAYS
Crude oil surged above $100 per barrel following escalating geopolitical tensions in the Middle East and disruptions to shipping through the Strait of Hormuz. The spike reflects fears that up to a quarter of global oil production could be disrupted by regional conflict.
Gasoline prices respond quickly because fuel is priced based on replacement cost rather than past purchase prices. Retailers adjust prices to reflect the expected cost of the next delivery, which moves almost immediately with wholesale markets.
A barrel of crude oil passes through a complex supply chain that includes extraction, transportation, refining, distribution terminals, and finally gas stations. The entire physical process can take weeks even though prices adjust overnight.
The psychological impact of gasoline prices is unusually strong because consumers see them displayed daily. Rapid increases often influence consumer sentiment and inflation expectations faster than the actual economic impact spreads through the economy.
The oil futures market currently shows backwardation, signaling that traders expect supply conditions to improve and prices to normalize over time. The spike reflects short-term uncertainty rather than a permanent structural shortage.
MY HOT TAKES
Recognize that oil price spikes are often driven more by fear and uncertainty than by immediate physical shortages. The largest price moves typically occur when markets first price in worst-case scenarios.
Understand that gasoline prices reflect expectations about future costs rather than past purchases. Replacement cost pricing explains why prices can move overnight even when the fuel in the ground was purchased weeks earlier.
Appreciate the outsized psychological role of gasoline prices in shaping consumer confidence and inflation narratives. Visible price increases can influence behavior even before broader economic impacts materialize.
Interpret the oil futures curve as a signal of market expectations rather than simply a price chart. Backwardation often indicates that traders expect current supply stress to ease over time.
Evaluate equity market reactions through the lens of uncertainty rather than commodity prices alone. For most companies, investor concern about unknown geopolitical outcomes matters more than the immediate price of oil.
You can quote me: “Gasoline prices are the only inflation number Americans see every day on a glowing billboard.”
Rude, oil. It happened to me. Just like this. My wife rolled into a gas station and asked for a fill-up. As a passenger, I had the luxury of observing the prices of the various grades of fuel as we rolled up. I knew prices were up–I have been writing about it almost daily for weeks. 👀 But I must say that prices of crude hit my worst-case DEFCON-3 levels far quicker than I was expecting. Was I expecting to watch crude trade over $100 just a week into the conflict? Was I expecting gasoline to have gained nearly $0.50 in 7 days? I’ve shown you the math and it seems to have played out as promised. So, it’s fair to say that I shouldn’t have been shocked when I saw the prices at the pump–and yet I was. Thankfully for me, most of my commuting these days is on public transportation, but for those of us who rely on cars to get around–meaning it is not an option, it’s a necessity–it will have a very quick impact on budgets and possibly consumption decisions.
We have seen moves like this before, but not quite as extreme. Flare ups in the middle east have, unfortunately, become quite common, and the prices of crude have responded to those crises. When Russia invaded Ukraine in 2021, however, we got a real taste of what a kinetic conflict can have on our household budgets as fuel prices jumped, becoming one of the many catalysts that caused the post-pandemic spate of inflation. The move was sustained and significantly higher than what was typical.
Iran sits on the third largest proven crude oil reserves in the world, though it is not the largest producer, largely due to sanctions and OPEC quotas. It is roughly the 7th largest producer and its neighbors have the capacity to make up for its complete removal from the supply chain. So how could the Iran attack have such a large impact on crude prices? Well, it has less to do with Iran’s supply and more to do with its ability to threaten 20% of the world's crude supply that floats past its back door every day. This has been Iran’s strongest bargaining position, and it has–not surprisingly–played its hand quickly.
That’s not all of it. Its gulf neighbors produce nearly 22 million barrels of oil in a single day. Those oil fields, those pipelines, terminals–all of it is well within the range of Iran’s missiles and drones, meaning there is a scenario where Iran can single handedly stop the almost 25% of world crude oil production in one way or another. Do you want to know what the possibility of that looks like? Well, all you need to do is look at the following chart of WTI Crude over the past seven days.
That’s right, last night WHILE YOU SLEPT, crude almost hit $120 per barrel, though it has faded back to just above $100 this morning. You may recall when I laid out the playbook for you back in mid-February ( link here: https://blog.siebert.com/wargames-war-risk-and-wall-street), crude above $100 was a tail event–meaning, it was not likely–definitely not preferred. But alas, here we are above $100. Traffic through the Strait of Hormuz has essentially ground to a halt and several of Iran’s neighbors have shut down production not only due to the threat of attack from Iran, but because they have nowhere to put the stuff once they pump it out of the ground! It is a mess.
Ok, ok, thankfully, I don’t buy oil by the barrel for everyday use, but unfortunately, everything I touch–down to my underwear 😊–has some sort of ties to crude oil, whether directly as a bi-product (synthetic material) or because of logistics (trains, planes, and trucks). More directly, my wife just paid 17% more to fill her car than a week ago! That is real. Let’s explore how that happens, so we can make some real life decisions. Be patient, keep following–this is important–trust me.
Let’s start at the beginning of the journey, because the process is actually quite elegant even if the price swings feel brutal. Crude oil begins its life as a barrel pumped out of the ground somewhere in the world like Texas, Saudi Arabia, Iraq, Canada, the North Sea, or yes, Iran and its neighbors. That crude doesn’t go straight to the gas station. It first enters a massive logistical network that moves it by pipeline, ship, rail, or truck to refineries. The United States alone has around 130 operating refineries with the capacity to process about 18 million barrels of crude oil per day.
Once crude arrives at a refinery, the real magic happens. A barrel of crude contains 42 gallons, but it is not simply poured into your gas tank. Instead, it is heated and separated through distillation towers–in a process called cracking–into multiple products: gasoline, diesel, jet fuel, heating oil, lubricants, asphalt, petrochemical inputs, and a whole host of materials that end up in everything from plastics to pharmaceuticals. On average, a US refinery will produce roughly 19 to 20 gallons of gasoline from a single barrel of crude, plus about 12 gallons of diesel and several other products. In other words, when crude rises, it doesn’t just affect drivers. It affects airlines, trucking companies, chemical producers, and manufacturers all at the same time. Margins in those industries can experience margin compression.
Once gasoline leaves the refinery, it doesn’t go straight to your corner station either. It moves through another distribution network of pipelines that stretch thousands of miles across the country to storage terminals. From those terminals, tanker trucks deliver fuel to individual gas stations. The entire process, from crude being pumped out of the ground to gasoline being pumped into your car, can take weeks. That’s the part that confuses people. If it takes weeks, why do prices change overnight?
The answer is something called replacement cost. Gas stations do not price gasoline based on what they paid yesterday. They price it based on what it will cost to replace the fuel tomorrow. If crude spikes overnight, wholesale gasoline markets immediately adjust because refiners know their next barrel will cost more. Distributors know the next truckload will cost more. My best buddy distributes gasoline and owns a bunch of stations, and he knows what the next delivery he receives at the wholesale level will cost more as well. If retailers kept selling gasoline at yesterday’s price while the wholesale market was rising underneath them, they would essentially be selling inventory at a loss.
My friend explains it this way. When a tanker truck pulls up to his station, he’s not thinking about what he paid last week. He’s thinking about what that next truck is going to cost him. His margins are actually quite thin–often only a few cents per gallon. Most of the profit at gas stations comes from the convenience store inside, not the gasoline itself. That bag of chips and cup of coffee is what keeps the lights on. The fuel out front is mostly a traffic generator.
This is also where hedging comes into the conversation, though briefly. Large distributors and refiners sometimes hedge their exposure to crude prices using futures markets. They may lock in prices weeks or months ahead of time to reduce volatility in their costs. But most individual gas stations are not sophisticated trading desks–though to be fair, my friend is quite sophisticated and probably did hedge this move–he does, after all, read my blog, though he doesn’t need me to tell him about crude prices. 😂 Most stations are just small businesses managing cash flow and deliveries. They react to the wholesale market as it moves, which is why those big signs on the corner can change so quickly.
And here is where the psychological element kicks in.
Gasoline prices are one of the few prices we see every single day. You don’t drive past a billboard showing the price of semiconductors, steel, or freight contracts. But you do drive past a giant glowing sign telling you exactly how much it costs to fuel your car. When that number jumps quickly, it hits consumers right in the gut. Even if gasoline represents only a portion of household spending, the visibility makes it feel bigger than it is.
It’s not just the cost of the fill-up. It’s the signal. People see gasoline prices rising and instinctively assume everything else is about to get more expensive too. Sometimes that is true. Diesel costs feed into transportation costs, which can affect the price of food and consumer goods. But often the psychological reaction happens faster than the actual economic impact. That is why spikes in gasoline prices tend to dent consumer confidence almost immediately. That is also why you are starting to see the word “stagflation” show up in eyeball-hungry headlines on the Internet.
But here is the part that is often forgotten in the middle of these moments: energy markets move in both directions. Just as quickly as crude oil spiked higher on the fear of disruption, it can also fall once the fear subsides. The oil market is forward-looking. Futures prices reflect what traders believe the supply and demand balance will look like in the months ahead. Right now, the crude futures curve is in backwardation, which simply means that prices for oil delivered today are higher than prices for oil delivered later. That structure typically occurs during periods of short-term supply stress. The market is effectively saying that conditions right now are tight, but they are expected to ease over time. See the following chart of WTI futures contracts through January of 2027–you can see the backwardation quite clearly. This reflects the fact that oil traders expect prices to normalize in the future. How fast is the big question.
This chart shows that the market itself is telling us that this spike may not last forever. That doesn’t mean prices will snap back overnight. Physical supply chains take time to normalize. Shipping lanes reopen gradually. Production resumes field by field. Refineries adjust runs and inventories rebuild. It’s a process measured in weeks and months, not hours. But the same market forces that pushed prices higher on fear will begin pulling them lower as clarity returns.
And that brings us back to the broader markets. The recent volatility in stocks has far less to do with the exact price of oil than many people think. Yes, certain industries feel it directly. Airlines, trucking companies, and logistics firms are particularly sensitive to fuel costs. For them, energy is a major input cost and rapid changes matter. But for the vast majority of companies, the bigger driver right now is uncertainty.
Markets hate the unknown.
When a conflict erupts in a region responsible for a significant portion of global energy supply, investors immediately begin modeling worst-case scenarios. What if shipping lanes close? What if production facilities are damaged? What if the conflict expands? Those questions drive fear. Prices adjust quickly to account for that uncertainty.
But as the days and weeks pass, those unknowns slowly become knowns. We begin to see which infrastructure is actually disrupted and which continues to operate. We see how quickly shipping routes reopen. We see how producers adjust output. As that information arrives, markets recalibrate. That price discovery is the process we are in right now.
Crude oil above $100 feels dramatic–and it is–but it is also a reflection of expectations. The oil market is constantly trying to answer one question: where will supply and demand balance in the future? Those expectations are already shifting as traders reassess the duration and intensity of the conflict.
It is highly unlikely that the current level of geopolitical tension will persist for years at this intensity. History tells us that conflicts evolve, negotiations emerge, and markets adapt. The biggest price moves often happen in the first moments of uncertainty. After that, the path forward tends to become clearer.
Which brings me back to that gas station moment with my wife. Yes, the number on the pump was shocking. Yes, it happened quickly. But the same forces that pushed that number higher will eventually bring it back down as conditions stabilize. The oil market is not static. It is constantly repricing the future.
For investors and consumers alike, the most important thing right now is patience and focus. Fear moves prices quickly. Facts move them back toward equilibrium. As the situation on the ground evolves and the fog begins to lift, energy markets will adjust, supply chains will normalize, and gasoline prices will follow.
As always, stay patient and stay focused. Get some important grounding in asking yourself the most important question of all–does the thesis for owning any of my stocks change with crude oil at 100 versus 60?
FRIDAY’S MARKETS
Stocks took it directly on the chin Friday, closing deeply in the red in response to a spike in crude oil and a weak monthly employment number. There was nowhere to hide under those conditions–inflationary pressure and labor market weakness.
NEXT UP
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