Is The Era of Cheap Oil Over

With the United States midterm elections drawing closer, American voters are confronting a sharp and politically inconvenient reality: petrol prices have surged by 36 per cent over the past month, breaching the psychologically significant threshold of USD 4 per gallon. The increase stands as a direct contradiction to President Donald Trump’s campaign pledge to reduce energy costs from “day one” of his administration. When pressed on how he intended to reverse the trend, Trump offered a characteristically blunt response, stating his intention to withdraw from Iran “very soon.”

Markets reacted promptly. The price of Brent crude fell sharply towards USD 100 per barrel following the president’s remarks, retreating from an intraday high of USD 119. For investors hoping the comment signals a swift resolution to the global energy crisis, however, the relief is likely to be short-lived. The structural damage inflicted upon energy markets by the conflict, combined with the geopolitical leverage Iran continues to hold over the Strait of Hormuz, points firmly towards a prolonged period of elevated oil prices.

The Strait of Hormuz remains the central issue. Approximately one fifth of the world’s oil and gas supplies transit this narrow waterway, and Iran’s ongoing blockade is currently withholding an estimated 13 million barrels of oil per day from global markets, representing the largest energy supply shock in recorded history. Tehran has shown little appetite for a swift resolution. Ebrahim Azizi, chairman of the Iranian parliament’s national security committee, stated on Wednesday that the Strait would only reopen to nations deemed “friendly,” and only upon payment of a GBP 1.5 million fee per vessel, a surcharge that alone adds approximately USD 1 to the cost of every barrel of oil traded.

Critically, the president’s ability to unilaterally reopen the Strait is limited. The waterway remains under Iranian sovereign influence, and any normalisation of transit will require sustained diplomatic progress rather than social media declarations. Ole Hansen, head of commodity strategy at Saxo Bank, has been candid on the point: “A while back, I stopped listening to what Trump says. Ultimately, Iran unfortunately holds the key and so far they have been showing no interest in using this key to unlock the Strait of Hormuz.” Hansen expects global supply to remain constrained for a period of three to six months, with Brent crude unlikely to return to USD 90 during that window, and a price closer to USD 100 representing the more plausible equilibrium given the scale of the market imbalance.

The damage to physical energy infrastructure compounds the problem considerably. Gulf states face months of repair work before shuttered oil wells can be brought back online. Qatar’s Ras Laffan facility, which accounts for approximately one fifth of global liquefied natural gas production, has sustained missile damage that officials estimate will require three to five years to fully remediate. These are not timelines that can be compressed by presidential decree, and the implications for global LNG supply, particularly heading into the Asian summer peak demand season, are significant.

Shipping markets face their own structural headwinds. Vessels will require months to reroute around the disrupted corridor, and the conflict has exposed a systemic vulnerability inherent in the global economy’s concentrated dependence on Gulf energy supply chains. In response, nations are expected to build substantially larger strategic reserves, a rational but demand-intensifying reaction that will sustain upward pressure on prices even as production attempts to recover.

Insurance costs present a further impediment to price normalisation. War risk premiums have risen sharply since hostilities commenced, and there is no clear mechanism by which they will recede quickly. June Goh, a commodities analyst at Sparta Commodities, warns that lingering risk premiums and vessel restrictions will continue to deter traffic from the Middle East even in the event that the Strait of Hormuz reopens without condition. Persuading underwriters to revise their assessments will require sustained evidence of stability, not merely a ceasefire announcement.

SEB, the Norwegian corporate bank, forecasts Brent crude averaging USD 100 per barrel for the remainder of the year, even under the relatively optimistic assumption that Gulf flows return to normalised levels by mid-May. Bjarne Schieldrop, SEB’s chief commodities analyst, has noted the strategic incentive Iran retains to keep prices elevated. As an oil exporter, Tehran benefits directly from supply constraint; restricting Hormuz flows simultaneously refills state coffers and inflicts economic pain on an adversary ahead of a politically sensitive electoral cycle. “The easy way of hitting back at Trump, if Iran is going to be vindictive, is elevated oil prices ahead of the midterm elections,” Schieldrop observed.

European gas markets have also deteriorated markedly, with prices rising by more than 60 per cent since late February. The supply disruption has prompted countries to draw down emergency stockpiles at an accelerated pace, and those reserves will now need to be rebuilt ahead of the northern hemisphere winter. That process will coincide directly with peak Asian summer gas demand, when air conditioning load across the continent drives consumption to seasonal highs, creating a competitive scramble for available supply at a structurally compromised moment for the market.

Hansen articulated the underlying dynamic clearly: “If we get a solution today, it doesn’t remove the fact that supplies into the global market have built up a massive deficit over the past month and we have a market where it will take time before production equals demand.” His longer-term outlook is equally sobering. Even beyond the current period of acute disruption, oil prices are unlikely to return sustainably below USD 80 per barrel for years. “If USD 70 was the old normal,” he stated, “I would imagine the new normal is probably closer to somewhere between USD 80 and USD 90.” Trump can signal intent, but only a material reduction in global demand or a significant expansion of supply capacity would mechanically bring prices back to pre-conflict levels. Neither scenario appears credible in the near term. As Hansen put it, getting back to pre-conflict pricing before the midterms “would be wishful thinking.”