Oil Spikes Above $120 Then Retreats
Oil prices spiked above $120 per barrel in what CNN calls "the biggest oil disruption in history" before retreating to just under $100 as Trump suggested the Iran war could end soon. Gas prices jumped 50 cents per gallon in the US since the conflict began, with markets staging a dramatic comeback — S&P 500 up 0.83%, Dow 0.50%, Nasdaq 1.38% by close.
The recent oil price volatility stems from the largest global oil supply disruption in history, with the conflict in Iran affecting about 20% of the world's oil supply. This is nearly triple the impact of the 1973 oil crisis, which affected around 7% of global supply. The main chokepoint is the Strait of Hormuz, through which about 20% of the world's daily oil supply, or roughly 15 million barrels, typically passes. The immediate trigger for the price surge is the effective closure of the Strait of Hormuz, which has halted most oil and gas shipments from major producers like Saudi Arabia, Kuwait, Iraq, and the UAE. This has led to production cuts as storage tanks fill up, with Iraq reportedly slashing output at its southern oilfields by roughly 70%. Iran, at the center of the conflict, typically exports around 1.6 million barrels of oil per day, primarily to China. In the United States, the national average price for a gallon of regular gasoline has risen to $3.48. This is an increase of 48 cents from last week and 58 cents from a month ago. While this is a significant jump, prices remain below the pandemic-era high of $5.02 per gallon. To counter the supply shock, discussions are underway among G7 nations about a coordinated release from strategic oil reserves. The U.S. Strategic Petroleum Reserve currently holds approximately 411 million barrels. This is significantly lower than its peak, having been drawn down to its lowest level in 40 years in 2022. Prior to the conflict, OPEC+ nations had already agreed to production cuts of 3.66 million barrels per day through the end of 2026 to stabilize prices. While key members like Saudi Arabia and the UAE hold most of the world's spare production capacity, their ability to quickly increase supply is hampered as long as the Strait of Hormuz remains impassable. The disruption is also causing a spike in shipping costs, with the price to charter a tanker from the U.S. Gulf Coast to China reaching a record high of over $29 million. This has pushed the cost of transportation to nearly $14.50 per barrel, accounting for about 20% of the recent price of WTI crude. Before the recent spike, the U.S. Energy Information Administration (EIA) had forecasted a slight decrease in U.S. crude oil production for 2026, with an average output of 13.5 million barrels per day. The same agency had projected that average retail gasoline prices in the U.S. would fall to around $2.90 per gallon in 2026, a forecast now in doubt due to the escalating conflict.
