Markets Underpricing Oil Shock Risk

Brent crude at $115 a barrel is being treated by markets as a spike. The data suggests something far more persistent is taking hold.

Prices have surged by close to 60% during March, marking one of the sharpest monthly moves in decades, while equities across Asia and Europe have sold off and energy-linked assets have repriced rapidly. 

Yet positioning across global portfolios still reflects an expectation that oil will retreat once tensions ease.

That assumption is increasingly difficult to justify.

Options markets are already pricing scenarios where oil pushes towards $150, signalling that at least part of the market is beginning to recognise the scale of the disruption. At the same time, the Strait of Hormuz—through which roughly 20% of global oil supply flows—is no longer operating as a stable transit route. 

Traffic has come under sustained pressure, shipments are delayed, and the risk of further disruption remains elevated.

A prolonged interruption here would remove between 10 and 14 million barrels per day from global supply, in a market where demand sits just above 100 million barrels per day. Spare capacity is limited, unevenly distributed, and unlikely to be deployed quickly enough to offset a shock of that magnitude.

Oil markets are responding to more than a single trigger. Military escalation is intensifying, infrastructure risks are expanding, and the political dimension is becoming more pronounced. Strikes on Gulf production facilities have already pushed aluminium prices higher, underlining how energy shocks are feeding directly into industrial supply chains rather than remaining contained within crude markets.

European gas prices are rising again, reinforcing the broader inflationary impulse, while equity markets—particularly in energy-importing economies such as Japan—are beginning to reflect the strain of higher input costs. Bond yields are edging higher as inflation expectations adjust, and currency markets are starting to differentiate more clearly between exporters and importers of energy.

Despite this, asset allocation still leans heavily on the idea that oil will revert lower.

Much of the past decade conditioned investors to expect geopolitical disruptions to be short-lived, with supply normalising and prices stabilising relatively quickly. Current conditions are materially different. Supply chains are tighter, spare capacity is constrained, and multiple pressure points are emerging simultaneously across logistics, infrastructure, and policy.

Political signalling is adding further complexity.

Donald Trump, as US president, has indicated a willingness to take control of Iranian oil assets, including the export hub at Kharg Island, while also expressing confidence that a deal could be reached. This combination of escalation and negotiation introduces a layer of uncertainty that markets are not fully incorporating. Policy direction is no longer a background factor; it is actively shaping expectations for supply and access.

Energy markets are therefore being driven by a broader set of forces than in previous cycles. Physical supply remains critical, but political intent, transport security, and infrastructure vulnerability are now feeding directly into price formation.

The comparison that fits best is not recent geopolitical flare-ups, but earlier periods where supply shocks had lasting macroeconomic consequences. Elevated energy prices feed into inflation, compress corporate margins, and weigh on consumer demand. Energy-importing economies face the most immediate pressure, while industrial sectors contend with rising costs across fuel, transport, and materials.

Financial markets are beginning to react, but the adjustment remains incomplete.

Equities are signalling stress, and derivatives markets are pricing more extreme outcomes, yet broader portfolio construction still assumes a relatively quick normalisation in oil prices. There is a clear disconnect between the scale of the disruption and the positioning that follows from it.

The move to $115 matters. The more important question is how long prices remain elevated and what that implies for inflation, growth, and asset performance.

Markets continue to look for a resolution that brings oil back down. There is little concrete evidence to support that view at present.

Investors who continue to treat this as a temporary spike risk being caught on the wrong side of a more durable shift in energy risk.