US President Donald Trump's 'little excursion' to the Middle East has landed the world in its biggest energy crisis in history.
As the Iran war crossed its miserable two-month mark, brent crude futures tore past $126 per barrel -- the highest level in four years. It's as if global crude oil prices are in a blindfold race not knowing where the finish line is or where the cliff begins.
With no end in sight for the war, analysts have revised full year global oil forecasts for the second time in two just months.
In the base-case scenario, oil is variously pegged to average $90-$100 per barrel in 2026, $100-$110 in an adverse case, and above $120 in a severe scenario. Last month, most predictions stood between $82-$95 per barrel in 2026. In 2025, they averaged $69 per barrel.
The sole reason for the grossly underestimated forecasts is the closure of the Strait of Hormuz. Initially, everyone expected the Strait to open by April and that producers would restart shut-in wells by May. That didn't happen.
Now, forecasters estimate the conflict to continue another month or two, during which period oil prices and supply shortages are likely to persist, though they may gradually correct thereafter. Or, as Trump repeatedly says, prices will likely 'drop like a rock.'
But will they?
Not everyone is convinced. Even if the Strait reopens, oil production recovery will take months, with damaged wells restarting only in years and export flows normalising rather slowly. As supplies remain trapped in onshore storage tanks, oil prices more than doubled in March, and by April, brent futures were up about 80%, while gasoil and jet fuel prices were up 102% and 120%, respectively, according to an ING report.
An estimated 500-850 million barrels of oil supply has been lost due to the war in the last two months, while production is down by over 10-14 million barrels per day. It remains to be seen if Iran will shut production or restart supply once the onshore storage wells reach full capacity by mid-May.
On April 8, both Iran and the US agreed to a ceasefire in which firing hasn't ceased and the reopening of the Strait ended up in a prolonged closure triggering the largest supply shock in history. The World Bank expects global energy prices to rise by about 24% in 2026 on the assumption that the most severe supply disruptions will end in May and that shipping volumes will gradually return to pre-war levels by the end of the year. Likewise, overall commodity prices will likely rise by 16%, reaching their highest level since 2022.
The International Energy Agency (IEA) has been repeatedly warning that the world is facing its biggest energy crisis in history due to disruption caused by the conflict. According to IEA, we are losing 13 million barrels per day, which is higher than the two 1970s oil crises when the world lost 5 million barrels per day combined. Similarly, the Russia-Ukraine war saw 3 million barrels of lost oil supply. Compared to this, the current 13 million barrels per day of lost oil supply and the consequences thereafter are staggering to say the least. Every additional day the Strait remains closed, the loss of global oil supply increases besides causing permanent impairment to the oil reservoirs.
In March, the 32-member IEA has tried to mitigate the impact by agreeing to release 400 million barrels of oil from emergency stockpiles. Going forward, it is considering releasing a second tranche of reserves, but the question is how long will the globally coordinated emergency stockpiles come to the world's rescue?
Even if the Strait resumes trade in May or June, the overall supply may remain below pre-war levels for rest of the year. The world could continue to lose 4-6 million barrels per day of capacity even after the Strait reopens and that means higher prices will prevail for months.
Which brings us to the question if the current oil prices fully reflect the severity of the supply disruption?
This is where, the United Arab Emirates' (UAE) shock exit from the oil cartel after 60 years of obedience comes into picture. The UAE, OPEC's third-largest producer, feels suppressed under production quotas and by exiting the cartel, it hopes to pump as it pleases. It's likely that in the long-run, higher production and supply from Abu Dabi may help moderate prices, but it could potentially trigger a price war among the Gulf oil heavyweights. Invariably, as with any oil price war, the global economy cannot escape the consequences.
India managed to absorb the initial energy price shock thanks to decades of fiscal consolidation. However, the rupee fell past the 95 per dollar mark hitting a new low of 95.34 on Thursday. The rupee is now down over 4% since the start of the Iran war and analysts aren't ruling out the risks of further weakness even touching 96 in the coming weeks.