Currently, the oil market is entering unprecedented uncharted territory. Previously, the language of the oil market was built on price discovery, marginal barrels, and supply-demand balance. However, in every crisis, there is always a moment when this language quietly but dangerously loses its meaning. For the oil market, that moment has arrived.

What we are witnessing is not a simple supply disruption, but a structural collapse happening in real time: the mechanisms that have dominated global energy flows for decades are crumbling, and market dynamics and stability are being fundamentally altered.

The fragility of the oil market has been warned of many times before.

This situation is not surprising. For years, analysts have warned of the increasing fragility of the global oil system. It is not only highly dependent on a few key chokepoints, but also built on the assumption and expectation that "energy flows will not be interrupted." For most oil market observers, even in the most pessimistic scenarios, they habitually believe that price will be the ultimate balancing mechanism.

Traditional theories generally suggest that higher oil prices will stimulate supply and suppress demand, eventually restoring equilibrium. However, reality is putting this assumption to a brutal test, exposing the enormous risks of over-reliance on price signals in fragile structures.

The Strait of Hormuz is closed: a vital global energy artery is severed.

While some still view the closure of the Strait of Hormuz as just another routine geopolitical disturbance, as indicated by the statements and policies of global leaders, particularly the European Union, it must now be viewed as the removal of the single most important artery in the global energy landscape. Whether this removal is partial or near-complete, it will have profound implications.

As is well known, about one-fifth of the world’s oil and liquefied natural gas are transported through this narrow waterway, which has now caused a supply loss of more than 13 million barrels per day. This level of loss cannot be absorbed by the market simply by price signals, highlighting the potential risks of widespread supply disruptions and market instability.

The discrepancy between the appearance of the financial market and the truth of the real market

Currently, financial markets have, to some extent, masked the immediate impact of the crisis. Fluctuations in oil prices, and even occasional dips, actually reflect traders' lingering skepticism about the authenticity, duration, and structural damage of this disruption.

However, the reality in the physical market is far more dire than it appears, even bleak. The decline in refinery operating rates in Europe and Asia is not due to demand destruction, but rather to insufficient feedstock supply. Storage dynamics warrant close attention: crude oil inventories are being depleted at an accelerating rate, and not only crude oil, but also petrochemical product inventories are declining rapidly. The entire market is self-consuming.

Refinery Dilemma: Supply Constraints Rather Than Demand Weakness

Policymakers, politicians, and financiers need to correct several key misconceptions. First, declining refinery utilization rates do not equate to weakening demand; quite the opposite, it is a direct reflection of supply chain constraints. European refineries are in a dilemma: their operating environment was already strained for years due to underinvestment and reduced Russian oil supplies caused by the Russia-Ukraine conflict. Now, the conflict in Iran and the Strait of Hormuz issue have further exacerbated the pressure. On the other side of the world in Asia, refineries, especially in highly import-dependent economies like South Korea and India, have shifted their procurement strategies from optimization to survival.

The timeline is more important than the headlines right now. Crude oil is not being delivered immediately. Until then, refineries in Europe and Asia can continue operating on oil shipped weeks earlier. Once these early shipments are unloaded and consumed, the reality will quickly become clear: there will be no replacements. Optimistically, by early May, the illusion of normalcy will begin to crumble; by mid-May, it will be completely gone.

Inventory buffers are nearing their limit, and the US is unlikely to be a savior.

Policymakers also need to reassess national inventory levels. Market indicators suggest that commercial inventories, which act as a last resort, are far thinner than publicly acknowledged. OECD commercial crude oil inventories have declined for several consecutive months and are now nearing operational minimums. Calls for the release of strategic petroleum reserves may arise again, but this would only provide temporary relief and cannot replace sustained normal flows.

Optimistic expectations for the United States are also unfounded. In media reports, the US is often portrayed as a "swing supplier" in the market, but its actual export capacity is limited, and domestic political pressures are beginning to demand a priority on securing domestic supplies over global markets. It is important to emphasize that this discussion is not about US oil companies as a whole, but rather about individual companies with shareholders.

Fragmentation in the oil market: Increased competition among regional sectors

Another unsettling reality is that the oil market is fragmenting into regional blocs in real time. The world no longer has a single, fluid oil market; instead, three relatively independent markets have emerged: Europe, Asia, and North America. These blocs are all competing for dwindling oil resources, each facing its own constraints and political priorities.

Europe is under immense pressure. For the past two years, the continent has been restructuring its energy framework, moving away from dependence on Russian hydrocarbons and towards maritime imports from the Middle East, the United States, and West Africa. The closure of the Strait of Hormuz, resulting in a supply loss of over 13 million barrels per day, has directly impacted Gulf oil shipments destined for Europe. Even with the United States maintaining high export levels, it cannot fully fill the gap in crude oil and refined product supply.

After decades of underinvestment and even closure, European refineries no longer have the capacity to flexibly adapt to all types of crude oil. Replacing Middle Eastern crude with other types will result in both technical and economic losses for refineries, further tightening the refined product market. Diesel, already in structural shortage in Europe, is expected to be the first major victim, followed by jet fuel and gasoline, with the consequences spreading to transportation and industry, ultimately driving up consumer prices.

Asia faces equally severe challenges, but in a different nature. For decades, Asia has been the largest importer of Middle Eastern crude oil, and this dependence is structurally increasing. While major Asian powers and India have benefited from discounted Russian oil, they are still unable to fully compensate for the loss of Gulf supplies. South Korea and Japan, with their limited domestic resources and extremely high import dependence, are particularly affected.

Energy security is replacing efficiency, and geopolitical power is dominating oil prices.

While competition for crude oil, fuels, and chemicals has emerged, it is not yet fully apparent. Long-term contracts are being renegotiated, spot markets are tightening, and logistics chains need to be restructured at high cost. This shift is not only geographical but also strategic. After decades of globalization and liberalization, energy security is making a strong comeback as a core strategy and risk.

In the coming years, energy security will take precedence over efficiency, which will reverse decades of globalization in the oil trade.

However, these changes still do not fully reflect the scale of the crisis. While logistical problems are serious, the more fundamental issue lies at the political level.

The assumption that the Strait of Hormuz can be reopened through negotiations is increasingly detached from reality. While diplomats and policymakers still believe in diplomacy, the reality is entirely different. The balance of power within Iran has decisively shifted to the Islamic Revolutionary Guard Corps (IRGC), whose strategic logic differs fundamentally from that of civilian decision-makers. For the IRGC, control of the Strait of Hormuz is not merely a bargaining chip, but a core pillar of its regional power projection.

Recent events have highlighted this shift. When the Iranian government announced the reopening of the Straits of Hormuz, the Islamic Revolutionary Guard Corps (IRGC) reacted in stark contrast. The IRGC ceased merely issuing signals and began enforcing them. Ships now require explicit approval to pass, and navigation is driven by military command rather than commercial logic. The contradictory statements between Iranian civilian officials and hardline commanders expose a fragmented state structure where diplomacy is largely a formality, while actual control remains firmly in the hands of the hardline, extreme military bloc, the IRGC. Ground evidence suggests that the IRGC has marginalized moderates and is pursuing a hardline strategy that rejects any form of negotiation.

Global oil market observers, politicians, traders, and financiers should recognize that this is no accident. Iran's actions have evolved into a deliberate, long-term war strategy: selective closures, controlled escalations, and maximum economic pressure on global markets. By transforming the Strait of Hormuz into a controllable chokepoint, Iranian hardliners retain leverage, avoiding full-blown military confrontation while maintaining control over the world's energy lifeline.

This is an "all or nothing" strategy unfolding over a long timeline. They are exploiting the West's dependence on stable energy flows and its political aversion to persistent disruptions, using a layered maritime denial strategy to create uncertainty and increase systemic costs.

Price signals fail: Power becomes the dominant force determining oil flows.

This has brought about the third, and perhaps most profound, shift in the oil market: price has been superseded by power to become the primary determinant of oil flow. In a normally functioning market, scarcity drives up prices, ultimately stimulating supply and suppressing demand, thus restoring balance. However, when geopolitical actors physically restrict supply, prices lose their balancing function. This is because if transport routes themselves are blocked, the actual delivery of oil cannot be achieved regardless of price.

In this reality, the oil market will no longer be unified, but fragmented. Once it enters this state, it will be difficult to quickly return to normal.

Summarize

The global oil market is currently facing unprecedented structural challenges. The continued control of the Strait of Hormuz, the deep-seated impact of the Middle East conflict, and the collapse of energy flow mechanisms are pushing the oil market into a new era dominated by power rather than price.
Policymakers, businesses, and investors need to recognize this reality as soon as possible and prepare for long-term responses to avoid being caught off guard in the upcoming energy turmoil.