Markets Are Still Sanguine About the Oil Outlook

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The striking thing about oil prices, given what is going on in the world, is how low they are.Crude oil exported from Iran, Iraq, Kuwait, Saudi Arabia, Qatar, and the United Arab Emirates (UAE) was equivalent to about 20% of global supply before the recent war with Iran, or more than 40% of all crude oil exports. Much of this supply is now unavailable,1 with traffic through the Strait of Hormuz still stuck around zero as ships avoid Iranian drones, missiles, and mines.Yet as of this writing, front-month Brent crude futures are trading at just $103/barrel. That is still lower, in nominal terms, than in the first few months of Russia’s 2022 invasion of Ukraine ($110-$130). It is also lower than the stable average of about $110 that persisted from early-2011 through mid-2014.Even more striking is how low the current price looks when adjusted for inflation and productivity growth. Dividing the monthly spot price of Brent crude oil by nominal U.S. disposable income per capita2 shows that today’s “real” price is right in line with the average since January 1988—and far below any previous period when the price of oil was considered too high.Moreover, anyone willing to wait for physical delivery can lock in prices substantially lower than the current spot price. Equivalently, anyone who has physical crude oil available to distribute today can get paid a massive premium to clear out their storage space in exchange for the promise to refill later.The August 2026 Brent futures contract was just under $90/barrel on the evening of March 12, the January 2027 contract was trading at just …