Oil market: panic remains conspicuously absent

The oil market is behaving like a man standing in a burning room insisting the fire alarm is probably faulty.

Three months into the Middle East conflict, with the Strait of Hormuz effectively constrained and inventories drawing down at an alarming pace, crude prices remain elevated but nowhere near the once-feared $150-plus apocalypse.

Brent briefly surged above $120/bbl earlier in the conflict, but has since settled into a strangely composed range despite persistent supply fears. The market’s relative calm increasingly appears disconnected from the physical tightness underneath.

That disconnect is now the defining feature of the oil market.

On one side sits the paper market, still convinced that diplomacy, reserve releases, and rerouted barrels will eventually restore normalcy. On the other sits the physical market, where producers, refiners, and tanker operators are warning that the system is becoming structurally tighter by the week.

Saudi Aramco chief Amin Nasser perhaps captured the dilemma best this week when he warned that the world has already lost nearly one billion barrels of cumulative supply since the conflict began, with another 100 million barrels disappearing every week Hormuz remains constrained. More importantly, he cautioned that even if the waterway reopened immediately, the market could take months, potentially years, to normalize because inventories have already been materially depleted and logistics chains badly disrupted.

Yet panic remains conspicuously absent.

Part of that owes to China, the world’s largest crude importer and currently the biggest swing factor in global demand. Chinese imports have slowed sharply amid elevated prices and weak industrial momentum. Refiners have cut purchases and leaned more heavily on domestic inventories instead. The slowdown has effectively acted as a shock absorber for the global market, offsetting part of the missing Middle Eastern supply.

In another environment, a near shutdown of the world’s most critical oil chokepoint would likely have triggered outright demand destruction across consuming economies. But so far, the global economy has proven more resilient than expected. Analysts increasingly argue that meaningful demand destruction does not begin until oil sustains levels well above $130-140/bbl. Current prices, while painful, are not yet catastrophic enough to force consumers off the road or industries into shutdown mode.

At the same time, governments have aggressively leaned on strategic petroleum reserves to suppress panic and smooth physical shortages. Those releases, alongside rerouting efforts and emergency supply arrangements, have bought time for the market. But they have not solved the underlying deficit. Physical balances continue tightening, floating storage is shrinking, and refinery inventories are thinning.

That is where the market’s complacency becomes harder to explain.

The market today appears caught between two competing narratives. One assumes eventual normalization and believes spare capacity, reserve releases, and slowing demand will prevent a full-blown energy shock. The other warns that the world is sleepwalking into a supply crunch whose consequences are merely delayed, not avoided.

For now, the former continues to dominate pricing behaviour. But the longer the stalemate persists, the greater the risk that oil markets eventually stop trading on hope and start trading on physics.