By: Brady Raanes
In last month's blog, we looked at two scenarios for how the conflict at the Strait of Hormuz might play out. The first was a longer, drawn-out war, resulting in $150-$200 oil, which would increase the risk of a global recession. The second scenario was a near-term resolution, with oil retreating, energy stocks giving up their gains, and the broad market rallying in relief. The second was our base case. For the most part, that's how it has played out thus far.
Oil peaked in mid-April and fell sharply on the ceasefire announcement. Prices have rallied back somewhat due to a lack of clarity around the ceasefire, but oil is still priced below its April high. Energy stocks followed the same pattern, giving back most of their March gains. Still, the energy sector is up roughly 34% year-to-date and remains the best-performing sector in the S&P 500. Meanwhile, the broader S&P 500 is breaking out to new all-time highs, and investors seem to be shifting their attention to corporate earnings.
But the more interesting story is what happened beneath the surface while oil was spiking. The plumbing of the global oil market came under more strain than the price alone would suggest, and that will still have an impact on where we go from here. Let's explore.
The Shock Absorbers That Didn't Absorb
When supply drops in the oil market, there are three mechanisms that balance things out. First, countries with spare production capacity open the taps. In practical terms, this typically means that large oil-exporting countries such as Saudi Arabia and the UAE ramp up their daily output above normal when the world needs more oil.
Second, if that doesn't solve the supply problem, then emergency inventories get drawn down. Countries keep reserves of crude stored specifically for disruptions like this. The US Strategic Petroleum Reserve is the biggest example, but reserves are limited. They're a short-term bridge, not a long-term solution.
Third, if increased supply and backup reserves aren't enough to meet demand, oil prices rise until demand is reduced. That's what we've seen thus far in 2026. In most minor disruptions, all three mechanisms work together, and the system finds a new equilibrium fairly quickly.
This disruption was larger. Nearly 14 million barrels per day of oil were removed from the global supply at the peak of the crisis. On average, global consumption of oil is around 100 million barrels per day. So, the supply shock knocked about 14% of the world's oil offline.*
We can't easily replace that. Most of the world's spare oil production capacity sits in Saudi Arabia and the UAE, which were both cut off by the same chokepoint as everyone else. The valve that's supposed to open was on the wrong side of the blockade. The US is actually the world's largest oil producer, and there is room for production to increase somewhat when prices rise, but bringing on new production isn't like turning a valve. It takes three to six months to drill, complete, and bring an oil well online meaningfully. That's reasonable in a normal cycle, not fast enough for a three-week supply crisis. Russia has some spare capacity, but its infrastructure is under attack, and its supply has actually been declining. So, the first shock absorber was effectively unavailable.
That triggered the second shock absorber. Global reserves drew down close to seven million barrels per day in April alone. That certainly helped, but the pace simply isn't sustainable for the longer term.*
Despite the relative inelasticity of oil demand, some demand destruction occurred, most of it taking place overseas. In parts of Asia, factories cut back to four-day workweeks. A handful of countries reinstituted work-from-home policies and school schedule changes reminiscent of early COVID. Some Middle Eastern governments rationed gasoline and diesel outright. This isn't the textbook version of price-driven demand destruction, where consumers choose to drive less; it's supply-constrained consumers being forced offline whether they like it or not. These measures led to another four million barrels per day of reduced demand.*
Whatever was left fell into something called emergency refinery curtailments. That's a fancy term for refineries that couldn't get enough crude oil, so they had to cut back.
*Daily barrel numbers come from research done by JP Morgan.
The details may be more than you need, but here's the important point. The three levers: (1) excess capacity, (2) strategic reserves, and (3) voluntary efforts to use less oil are all short-term measures to cushion a supply shock. They don't stand up to a sustained shock in the oil market. Nothing is solved. This is just a band-aid.
The increased price of oil is the final piece of the supply/demand relationship. When the three levers are insufficient, oil prices rise.
What This Means for Oil
Reserve inventories were drawn down so aggressively that the rebuild alone creates a demand floor for an extended period. The Strategic Petroleum Reserve has to be replenished, and that refill process puts the government on the buy side for months. That said, they don't have to refill the reserves right away. I suspect (and hope) that the US would be strategic about its oil purchases in the near future rather than replenishing the reserves at any cost.
Shipping and insurance costs have risen considerably since the start of the conflict, and they won't reset quickly either. That is likely to keep crude oil costs elevated even when headline prices retreat.
If we see a fresh flare-up in the region, oil could drift back toward the highs faster than a lot of investors expect. If demand weakens meaningfully, or an agreement is reached to reopen the
Strait, prices could overshoot lower, but that's becoming a less likely path. Either way, I'd expect more volatility in the energy complex than we've grown accustomed to over the remainder of the year.
For energy stocks, the easy part of the trade has played out. But here's the thing: energy companies don't need oil prices to move higher from here to keep generating strong cash flows. They just need oil to stay elevated. At current prices, most well-run E&P companies are printing free cash flow, paying down debt, and returning capital to shareholders through dividends and buybacks. And even if the Strait reopens fully, the risk environment for producers and shippers in the region has been permanently repriced. Insurance costs are higher. Tanker operators are going to think twice about routing decisions. No one wants to be the shipping company whose vessel gets attacked, and replacing a tanker takes years, not months. Those frictions don't disappear when the shooting stops.
In other words, energy stocks may still serve as a good hedge.
The Bigger Picture Hasn't Changed
The stock market seems to have decided, at least in the near term, that it cares far more about earnings and the continued buildout of AI infrastructure than it does about oil and geopolitical risk. Investors aren't wrong.
There is a lot to like in the market right now, earnings season is kicking off, and we expect the earnings reports from the first quarter to be strong across the board. Earnings drive stock prices. New all-time highs for stocks are typically a sign of continued strength.
Still, geopolitical risks and oil shocks remain the largest concern. It's also worth mentioning that oil disruptions ripple through a surprisingly long list of other input costs. Fertilizer prices are closely linked to oil and natural gas, meaning higher food costs down the line. Petrochemicals and plastics show up in everything from packaging to medical supplies. Jet fuel and diesel drive the cost of shipping every physical good sold. Even helium, a critical input in semiconductor manufacturing, is a byproduct of natural gas production, so energy disruptions can quietly show up in chip prices months later. In short, when oil moves meaningfully, the cost of making and moving almost everything moves with it.
It remains to be seen if and when those headwinds arrive. Every day that oil prices stay elevated increases the risk of further disruption. Regardless, the stock market seems to have moved on. The focus has shifted away from oil for the time being, but we will keep a watchful eye on the developments.
Any opinions are those of Brady Raanes and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal
matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing in oil or the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
S&P 500: This index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It consists of 400 industrial, 40 utility, 20 transportation, and 40 financial companies listed on U.S. market exchanges. This is a capitalization-weighted index calculated on a total return basis with dividends reinvested. The S&P represents about 75% of the NYSE market capitalization.