Oil Prices Surge on Iran Tensions, But Fundamentals Point to a Correction

Brent crude oil climbed from $61 per barrel at the start of 2026 to $118/b by quarter's end, posting the largest inflation-adjusted quarterly gain in data going back to 1988 the largest inflation-adjusted quarterly gain. The move was not speculative fever alone-it was a physical supply shock unfolding in real time.

The immediate catalyst arrived on April 2, when President Trump threatened to strike Iran "extremely hard" within days. Markets reacted instantly: WTI jumped 8.2% to $108.36, Brent surged 7% to $107.60 WTI jumped 8.2% to $108.36, Brent surged 7% to $107.60. The speech offered no clear path to de-escalation, and hopes for a rapid resolution faded.

But the real disruption had been building for weeks. Since U.S. and Israeli military strikes began on February 28, the Strait of Hormuz has been effectively closed to oil tanker traffic. Roughly 20% of global oil shipments pass through this narrow chokepoint, and Oxford Analytica analysts say commercial navigation is unlikely to resume in the near term Strait of Hormuz affects 20% of global oil shipments.

Earlier attacks had already signaled the vulnerability of Middle Eastern infrastructure. In mid-March, Iranian drones and missiles targeted an Iraqi oil field, while operations at the UAE's Shah gas field were suspended attacks on UAE Shah gas field and Iraqi oil field. Crude loadings at the UAE port of Fujairah were halted repeatedly.

The market was no longer pricing in a temporary disruption. It was pricing in a sustained squeeze on physical supply.

The Fundamental Picture: Surplus Despite the Noise

The price spike has disconnected crude from its underlying market reality. Behind the geopolitical drama, the supply-demand balance tells a different story-one of surplus, not scarcity.

J.P. Morgan Global Research expects Brent to average around $60/bbl in 2026, a level well below the $118 current price. The bank's bearish forecast rests on soft fundamentals that point to lower oil prices in the coming months, despite the recent spike driven by Iran tensions.

World oil demand is projected to expand by 0.9 million barrels per day in 2026, but global oil supply is set to outpace that growth. The surplus is not theoretical-it was already visible in January data and is likely to persist. Natasha Kaneva, head of Global Commodities Strategy at J.P. Morgan, noted that balances continue to project sizable surpluses later this year, suggesting that voluntary and involuntary production cuts will be needed to prevent excessive inventory accumulation.

Russian oil sanctions are reshaping trade flows but not tightening the overall market. Under pressure from sanctions, geopolitical risks and price differentials, crude flows are being redirected. India's partial pullback from Russian crude-amounting to a loss of 600–800 thousand barrels per day-is being offset by increased shipments to China, where Russian crude imports have risen by 0.5 mbd Russian crude imports have risen by 0.5 mbd. Independent refiners and storage facilities in China are providing the flexibility to absorb these discounted barrels.

The key point: even with strong demand, supply growth is stronger. The market is not structurally tight. What we're seeing in prices is a geopolitical premium layered atop a fundamentally soft market. Unless production cuts materialize to absorb the surplus, the pressure beneath current prices will be downward, not upward.

What This Means for the Market Balance

The current price spike-Brent near $110 per barrel-embeds a substantial geopolitical risk premium, but the market now faces a critical fork in the road. The key uncertainty is whether the Iran conflict escalates into prolonged supply disruptions or remains a contained incident.

J.P. Morgan's view that "protracted disruptions to oil supply are unlikely" rests on two pillars protracted disruptions to oil supply are unlikely. First, the U.S. does not rely on Middle Eastern energy, reducing the incentive for a prolonged military campaign focused on infrastructure the US does not rely on Middle Eastern energy. Second, other nations are stepping in to maintain Gulf shipments-the UK has convened a virtual summit with nearly 36 countries to secure navigation through the Strait of Hormuz virtual summit with nearly 36 countries.

But here's the tension: if the Strait of Hormuz remains closed for an extended period, the physical shortage could override surplus concerns temporarily. Roughly 20% of global oil shipments pass through this chokepoint, and commercial navigation has been halted since late February Strait of Hormuz affects 20% of global oil shipments. In that scenario, the market would be pricing in actual supply loss, not just risk premium.

The fundamental picture remains clear though. Even with strong demand growth of 0.9 million barrels per day, supply is set to outpace it global oil supply is set to outpace demand. Oil surplus was visible in January data and is likely to persist Oil surplus was visible in January data. If tensions ease-or if military action remains targeted as J.P. Morgan expects-the market will revert to pricing the supply-demand imbalance, not the geopolitical headline.

The bottom line: the market is currently pricing in a worst-case supply scenario, but the odds favor a return to fundamentals unless the conflict directly and persistently damages production infrastructure. The pressure beneath current prices is still downward.

Catalysts and What to Watch

The price spike has created a fragile equilibrium-Brent near $110 per barrel embeds a substantial geopolitical premium, but several catalysts could either sustain this level or trigger a rapid reversal.

The first and most immediate variable is the U.S. military timeline. President Trump's April 2 threats targeted Iran "extremely hard" within days, but the speech offered no clear exit strategy no clear exit strategy. Markets will scrutinize any further military action for signs of escalation or de-escalation. If the U.S. signals a limited campaign focused on specific targets rather than infrastructure destruction, the risk premium could evaporate quickly.

Tanker traffic through the Strait of Hormuz serves as the leading physical indicator. Roughly 20% of global oil shipments pass through this chokepoint, and commercial navigation has been halted since late February most shipping traffic stopped traversing the Strait of Hormuz. Any resumption of tanker movements would signal a rapid supply restoration, likely triggering an immediate price correction.

Inventory and refinery data will reveal whether the market is truly tight or simply fearful. The crack spread-the difference between crude oil prices and refined products-jumped to a 1.5-week high in mid-March, encouraging refiners to purchase crude crude crack spread jumped to a 1.5-week high. But this response assumes supply remains constrained. If inventories build while prices stay elevated, refiners will cut runs, adding downward pressure on crude.

OPEC+ faces a critical decision point. J.P. Morgan projects "sizable surpluses later this year" and notes that "voluntary and involuntary production cuts will be needed to prevent excessive inventory accumulation" production cuts will be needed to prevent excessive inventory accumulation. If the surplus persists, the group may be forced to extend cuts-potentially offsetting any supply disruption from the Middle East.

The key risk is a rapid resolution. Should diplomatic efforts succeed or military action remain targeted, the geopolitical premium could disappear within weeks. J.P. Morgan's baseline forecast of $60/bbl for 2026 represents the fundamental floor Brent crude averaging around $60/bbl in 2026. A swift de-escalation could see prices retreat toward the $60-70 range as the risk premium evaporates and surplus concerns reassert dominance.

The market is pricing in a worst-case supply scenario. What it should be pricing in is a surplus that demands management-through production cuts, not geopolitical fear.