Sticky oil price is a big worry

Oil markets have always had a complicated relationship with geopolitics. Prices spike on the headline, traders wait for the barrels to actually disappear, and the risk premium usually fades. This time, the more worrying signal is coming from somewhere else: the market is beginning to price duration.

Brent has crossed USD107 a barrel, up sharply from around USD72 before the Iran war. The immediate trigger is familiar. Hopes of a quick US-Iran understanding have again run into reality, with Washington rejecting Tehran’s latest seven-day proposal linked to reopening the Strait of Hormuz. Yet the market response is becoming less about the next missile and more about how long the disruption could last.

There is a twist, however. Physical supply is not moving in the same direction as prices. Saudi Arabia has restarted crude loadings from Yanbu after repairing the East-West pipeline, with pipeline flows currently around 2.65 million barrels per day and scope for a further recovery. Middle East crude exports have consequently moved closer to 80 percent of pre-conflict levels.

That should, in theory, be bearish for crude. It isn’t proving to be enough.

The reason is that the market is now pricing the gap between what can technically move and what can move reliably. Hormuz remains constrained, alternative routes are more expensive and vulnerable, tanker availability and insurance costs have risen, and the Red Sea is hardly a risk-free substitute. In other words, barrels may be finding their way out, but at a much higher geopolitical and logistical cost.

That distinction matters.

A temporary physical shortage can be solved when production resumes. A prolonged risk premium is harder to unwind because it is built into shipping decisions, inventories, insurance and forward contracts. The signal from the futures curve is particularly telling. Deutsche Bank points to December 2027 Brent futures reaching new highs, suggesting that investors are no longer treating the current spike as purely a front-end event.

This is perhaps the biggest change from the earlier phase of the crisis. The question is shifting from “how much oil is lost?” to “how long will the market have to operate with this level of uncertainty?”

For Pakistan, that distinction matters more than the headline USD107.

A temporary move towards USD100 is uncomfortable but manageable. A sustained USD100-plus environment would work through the import bill, inflation, transport costs and the external account for much longer. It would also make the government’s petroleum levy ambitions more complicated. There is only so much of a global oil shock that can be passed through to consumers before domestic prices become politically and economically difficult to absorb.

Pakistan does enter this episode with considerably better buffers than in 2022. The current account is healthier, reserves are stronger, domestic demand is relatively subdued and the rupee has been more stable. But those are shock absorbers, not shock erasers.

And there is one more uncomfortable point. The market does not need Hormuz to be completely shut to remain nervous. It only needs traders to believe that the waterway could remain unreliable for long enough to keep shipping, insurance and inventory costs elevated.

That is why today’s retreat in crude prices, if sustained, should not be confused with a return to normality. The market is oscillating between two competing possibilities: recovering physical flows on one side and stalled diplomacy on the other. Until one decisively wins, oil remains hostage to the next headline.

For Pakistan, the immediate issue is therefore not whether oil hits USD120. It is whether USD100-plus oil becomes the new normal.