(Idea) A Record-High Stock Market Is Heading Into An Oil Supply Shock
By: Jon Costello
The stock market is acting as if the Strait of Hormuz crisis is over. Brent, at $98 per barrel, trades at a level justified by inventories alone, with no risk premium to speak of. The S&P 500 just closed at a record for the sixth straight session and has risen for nine weeks running, its longest winning streak since 2023, while the tech rally has shrugged off the oil spike entirely.
But it isn’t over. Iraqi production remains under force majeure, roughly 2,000 ships are still stranded in the Gulf, and the fighting grinds on, with Iran striking U.S. bases in Kuwait and Bahrain just yesterday.
I laid out the supply math in March and concluded the disruption would outlast the market’s patience. It has. This piece takes the next step by examining how a supply shock that persists for months or longer affects stocks and bonds.
The Ongoing Disruption
The ongoing loss of oil supply is structural, not a headline that will fade in a few weeks. Net of producer workarounds, SPR releases, and demand curtailment of approximately 3 million barrels per day (bpd), the market is running an effective deficit of around 5 million bpd. This deficit is too large to be met by production. Even if the disruption ended today, the barrels needed to close the supply gap would arrive in quarters, not weeks. A persistent deficit forces prices higher until demand falls to meet supply. That is the setup, and everything that follows is its consequence.
Despite this setup, the market is pricing in none of it. Sustained high oil prices act as a tax on a slowing economy, and sudden price spikes become more likely, pressuring both the economy and stock prices. The market has priced in none of this, which leaves it dangerously exposed to a severe decline.
Near-Term Supply Constraints
The buffers that absorbed supply shocks before the conflict are nearly gone. The market entered this crisis well supplied through its usual structural cushions, namely, excess commercial inventories and ample OPEC spare capacity. The deficit has drawn both down to almost nothing. OECD inventories are now drawing down to hand-to-mouth levels.
At the same time, OPEC+’s spare capacity has been crippled just when it is needed the most. Most resides in Saudi Arabia and the UAE and must exit through the same blocked Strait. Spare capacity that cannot reach a tanker isn’t spare capacity. So the deficit isn’t just draining the buffers; it’s removing those that matter most.
Medium-Term Supply Constraints
Even if a ceasefire took hold tomorrow, the supply side would remain disrupted for months. ADNOC’s chief executive says that restoring flows to 80% of pre-conflict levels would take at least four months after fighting ends, with full volumes unlikely to be restored before the first half of 2027. Furthermore, war-risk insurance has jumped from about 0.25% of a vessel’s value to 3% to 8%, which translates to between $3 and $8 million for a large tanker. Insurers are also requiring months of stability before restoring coverage.
Distance compounds the delay. Replacement barrels must travel at sea for six weeks before reaching the U.S. Gulf Coast. Reopening the Strait begins to normalize supply, but barrels do not arrive for weeks.
Long-Term Supply Constraints
Non-OPEC supply is far less able to respond to this shortfall than in past cycles. The EIA forecasts non-OPEC+ output growth of approximately 1.0 million bpd in 2026. The offshore projects in Brazil, Guyana, and Canada, which are driving most of the growth, were sanctioned years ago, and no price spike can bring them forward. U.S. shale production won’t fill the gap either. The major operators are working down dwindling drilling inventory, and few will chase a wartime price they expect to fade. The supply response will be measured in quarters and years, not weeks. And it will arrive small.
Then there is the alternative longer-term scenario in which Iran emerges from the conflict able to throttle traffic through the Strait at will. It will thereby have gained both the motive and the means to keep crude prices elevated. I would not build a thesis on that outcome, but it is a risk, and it points in only one direction for longer-term oil prices: up.