Key Takeaways
The Iran conflict has led to higher premiums on U.S. oil production as markets have shifted from oversupply to a supply shortage.
The world now relies less upon oil than it did in 1973, dropping from 51% of global energy to 34% in 2024.
Estimates are that 136 million barrels of oil and petroleum products are locked in the Gulf because of the conflict, and production has been stalled due to a lack of storage capacity.
Because of damage to some facilities, the restoration of production at the cessation of hostilities may need to ramp up slowly.
U.S. refineries are operating near capacity, while Asian facilities run at much lower capacity due to their reliance on Persian Gulf oil.
The Iranian conflict has shifted the global oil market from oversupply to a shortage of 750,000 barrels per day this year. From an expected oil oversupply of 1.63 million barrels per day to an expected average production loss of 2.38 million barrels per day in 2026, which has triggered a surge in spot prices, with oil trading at steep premiums. Spot premiums for U.S. West Texas Intermediate (WTI) oil are at an all-time high due to competition between Asian and European refiners. According to the Associated Press, despite price increases, the U.S. and global economies are better insulated from oil shocks now than in the 1970s due to energy-efficiency gains, reduced reliance on Middle Eastern oil, strategic stockpiling, and alternative energy sources, including natural gas, nuclear power, and renewables. For example, oil’s share of global energy fell from 51% in 1973 to 34% by 2024, according to the 2025 Statistical Review of World Energy.
According to Reuters, an estimated 136 million barrels of crude oil and products are trapped in the Gulf due to the conflict. Even if shipping is allowed to flow freely through the strait, restoring oil production to pre-conflict levels will likely take months, depending on the extent of damage to oilfields during Iran’s attacks and the resulting shutdowns. A slow return is expected, with around two million to three million barrels per day potentially returning in the first month as export flows resume, followed by another two million to 3.5 million barrels per day over the rest of the second quarter of 2026. There may also be a chance that around one million to two million barrels per day of capacity may be permanently lost or limited even after the war, which would set the stage for a tighter market and increased price volatility.
In the United States, the shale oil renaissance, driven by hydraulic fracturing and directional drilling, has made the United States the world’s largest oil producer and a net petroleum exporter, with countries turning to it for secure supplies amid OPEC’s lower oil production and the effective closure of the Strait of Hormuz. Reuters reports that U.S. refinery utilization rose to nearly 92% last month, with Gulf Coast utilization averaging above 95%, up from around 90% a year earlier and a five‑year seasonal average of about 82%. That has resulted in U.S. refined products exports hitting a record in March. In comparison, Asian refinery utilization slipped to the low- to mid-80% range.
Via Reuters, offers for WTI Midland oil delivered to North Asia in July on very large oil carriers had premiums of $30 to $40 a barrel, depending on the benchmark used, up from premiums of close to $20 a barrel for deals concluded in late March and early April. Bids for WTI Midland delivered to Europe rose to a record premium of nearly $15 per barrel against Brent oil on April 9. Wider discounts on U.S. crude oil compared with global benchmark Brent have increased demand for tankers on the U.S. Gulf Coast, reducing vessel availability and driving up freight rates.
To soften the shock and potentially keep oil prices somewhat contained, the International Energy Agency’s 32 member countries agreed to release 400 million barrels of oil from their strategic reserves. The United States agreed to release 172 million barrels from its Strategic Petroleum Reserve, established in 1975. President Biden had depleted a large portion of the reserve, drawing it down to 58% of its capacity, to lower gasoline prices ahead of the 2022 midterm elections. At that time, Russia invaded Ukraine, and oil and gasoline prices shot up. President Trump and Energy Secretary Wright have been trying to refill it before the conflict in Iran occurred. The rapid drawdown during the Biden administration also damaged the SPR facilities, necessitating ongoing repairs that have slowed the refill.
Some countries are providing fuel price relief. Reuters reports that Germany has agreed to provide fuel price relief to consumers and businesses worth $1.9 billion. The energy tax on diesel and petrol will be cut by about 0.17 euros per liter for two months. Germany also agreed to let companies pay a 1,000-euro ($1175) relief bonus per employee, exempt from payroll taxes and social security contributions. Irish Prime Minister Micheál Martin announced his government will offer new fuel tax cuts amounting to $592 million. The relief measure, which needs parliamentary approval, would come on top of a 250-million-euro ($294 million) tax break approved nearly three weeks ago.
Analysis
The blockage of the Strait of Hormuz is driving up prices for oil and refined products, and the U.S. industry is benefiting. Higher prices mean increased production and refinery utilization to help mitigate the supply shock. More U.S. oil production also helps improve the environmental quality of global production. As we explain in the 2026 Environmental Quality Index, the environmental quality score of the average barrel of oil produced by the U.S. is significantly higher than that of other top-producing countries.
For inquiries, please contact [email protected].
