The "kidnapped" crude oil: Is Iran reshaping global crude oil pricing power?

Ask AI · What is the current progress of the crude oil pricing logic event?

Editor’s note: The fighting in the Middle East is striking the world’s most sensitive energy nerves. Behind the sharp swings in international oil prices, expectations for inflation and interest rate volatility are intensifying global economic uncertainty, and the cracks in the “oil-dollar” system are accelerating the reshaping of the global energy landscape and financial rules. Tencent Finance has planned a series of content called “Energy Flashpoints,” following the unfolding direction of the Middle East situation, tracking the impact chain of events, decoding the underlying logic of energy games, and looking into future trends. This is the 2nd installment of the series.

Energy Flashpoints

Issue 01丨Xu Qin Hua: The essence of the US-Iran conflict is the “petrodollar” defense war launched by the United States

By | Feng Biao

Edited by | Liu Peng

On March 23, when Trump first announced that he would delay the airstrike on Iran by five days, international oil prices quickly and sharply fell under expectations that the situation would ease. However, one day before Trump’s five-day deadline expired—on the 26th—he announced a second delay of the airstrike by another ten days. Then, the market did not buy this cooling scenario; international oil prices rose rather than fell. London Brent crude futures again exceeded $100; on the 27th, they rose 3.3% to close at $105.32. On the 27th, WTI crude jumped 5.46% to $99.64.

The stalemate between the US, Israel, and Iran is keeping crude oil prices high. More importantly, Iran has become a key variable controlling whether oil prices rise or fall in an asymmetric way. Even if tensions in the future are resolved with easing, the crude oil pricing rule framework likely cannot return to how it was in the past.

Oil price outlook: the center shifts upward, while surge momentum weakens

In the current state of the US-Iran conflict, if we use an analogy that may not be particularly precise, it is like a standoff between two groups: one side is very strong, the other is weak. The strong side intended to wrap things up quickly to end the conflict, but at the last moment, the weak side suddenly grabbed an important hostage. As a result, the two sides fall into a temporary deadlock and face each other. The weak side certainly would not dare to directly kill the hostage, because then it would have no leverage for threats and negotiations; similarly, the strong side would not dare to launch a full-force assault, because if it does, the weak side might easily lose control and do something like “fight to the end and die together.” But the danger during the deadlock is that it is easy to misfire—any spark could trigger a chain reaction.

As for where international oil prices will go, although Trump’s recent moves to ease the situation have prevented a major surge in the short term, multiple research institutions have given a negative answer to whether, even after the crisis ends, oil prices can return to levels below $70 per barrel before this round of crisis.

Even if the United States has recently made high-profile claims that it will work with allies to escort cargo ships through the strait, as Goldman Sachs cited recently in a research report quoting Kevin Donigan, a former commander of the US Navy’s Fifth Fleet, it is important to distinguish between the “capability” and the “scale.” Relying solely on military escort cannot restore the Strait of Hormuz’s oil flow to normal levels.

Donigan analyzed that escorting can restore at most about 20% of normal oil flow, and this largely depends on how the conflict ends and on Iran’s response to the initial escort convoys. Moreover, there is no switch that can be flipped instantly; the conflict cannot suddenly stop on one day and then oil flow returns the next day.

A research report by China Aviation Futures (CIF) suggests that continued disruptions to navigation through the Strait of Hormuz are expected to keep supporting oil prices. Even if the conflict gradually eases, the oil price center will move noticeably higher than before the conflict. Chen Zhanming, Vice Dean of the School of Applied Economics at Renmin University of China, also said that given that some oil infrastructure has been attacked and that restoring production takes time, the likelihood of oil prices dropping back to pre-crisis levels is very low.

An Oriental Fortune Securities research report, through comparative analysis of past oil crises, finds that historically, oil price pulses typically last 3–5 months, and after a pulse ends, the oil price center tends to rise. This round of the Strait of Hormuz blockade carries more than one-fifth of global crude oil seaborne transport volume, and the intensity of supply disruption is significantly higher than during the 2022 Russia-Ukraine conflict, meaning oil prices still have room to move upward.

However, regarding the potential magnitude of oil price increases, the research by the above institutions all believes that the rise will be limited. China Aviation Futures argues that as marginal changes in geopolitics occur, the momentum for oil price increases may be weakened. Oriental Fortune Securities believes that as the IEA has coordinated the release of strategic reserves and OPEC+ has announced increased production, the hedging mechanism is more mature than in the previous two crises, which may constrain the peak of oil prices to some extent.

Logic changes: a new system or a reshaping of oil price rules

In fact, at the very beginning of the conflict, the market underestimated the event’s impact. On the morning of March 2, WTI prices were up by about $10 versus mid-February. At that time, well-known economist Krugman also commented that “so far, the market is essentially betting that this war will be short-lived and not very destructive.” He also analyzed that although Iran is an important oil-producing country, it accounts for only a small share of total global oil production—falling from 8.5% in 1978 to 5.2% today. Based on that alone, people would not think that an interruption of Iran’s exports would cause a major surge in global oil prices.

But since Iran took control of the strait, international oil prices have surged rapidly. The future predicament is that the Strait of Hormuz may remain under the shadow of ongoing panic. Iran has seized the bargaining chip it can use to negotiate with the United States. Even if it relaxes control in the short term, new tensions in the future could tighten the noose again. A series of attacks that have already occurred and potential threats are enough to make ship owners, crew members, and insurance companies step back.

According to Chen Weidong, former chief researcher at CNOOC, the intensity of this conflict is expected to drop quickly, but the confrontation may exist for the long term. As a key energy transportation corridor, the Strait of Hormuz may gradually move toward a “security under new rules.”

Chen Weidong explained: “Although it is still hard to tell what this ‘security under new rules’ will specifically look like, you can make some guesses based on Trump’s style of doing things—for example, whether he will make major countries share the cost of escorting ships through the strait.” In Chen Weidong’s view, the Strait of Hormuz and its impact on crude oil exports cannot return to pre-crisis conditions.

On March 29, according to reports from media outlets including CCTV News, Pakistan’s deputy prime minister and foreign minister Darar said on social media that the Iranian government has agreed to allow an additional 20 Pakistan-flagged ships to pass through the Strait of Hormuz, with two ships passing through the strait each day.

In Chen Zhanming’s view, the current situation maintains a delicate balance. Iran selectively allows tankers belonging to different countries—or different ownerships—to pass through, rather than completely blocking them. To a certain extent, this also prevents oil prices from rising to a very dangerous level. Meanwhile, according to some publicly available reports, Iran may also be considering charging a “toll” on tankers passing through the strait in the future as compensation for war expenses. These actions are things that have not appeared before, and they will cause crude oil pricing in the future to follow new rules.

Chain reaction: “time is unfavorable for Trump”

On the impact of rising energy prices, in a recent research report, Goldman Sachs lowered its economic growth expectations for the United States, Japan, Europe, and most emerging economies, and raised its inflation expectations. It also pushed the Fed’s next rate cut point far back from June to September.

But the market has not been overly pessimistic. Concerns about inflation have not yet evolved into concerns about a recession.

A recent study by Oxford Economics, a forecasting and consulting company, argues that if crude oil prices remain at $140 for two months, it will push some global economies into a mild recession. In addition, an economist survey conducted by The Wall Street Journal shows that $138 is the critical point for the United States.

Moreover, if we compare with historical cases where crises were driven by crude oil supply, the current oil price increase is not as large as in those earlier periods. After the 1973 Arab oil embargo, international oil prices rose by nearly 4 times; the second crisis triggered by the 1979 Iranian Revolution caused oil prices to rise by 3 times. A research report by the UK research institution TS Lombard analyzes that during the GDP contraction driven by oil in 1990, WTI crude prices rose by 166%. To produce an oil-price shock of the same scale today, the oil price would need to reach $175.

But in the process of managing high inflation in recent years, if high oil prices bring inflation back up again, that in itself is a challenge. The Economist noted that if the Fed tries to fight a surge in inflation by raising rates, it may find itself constrained. And if the dovish candidate Kevin Warsh—whom Trump nominated to lead the Fed—tightens monetary policy at the start of his tenure a few months later, Trump is very likely to become furious.

Nobel Prize–winning economist Krugman recently wrote that: although Americans’ day-to-day lives may not be completely disrupted, the public in the United States truly does not like high oil prices. In this matter, time is unfavorable to Trump, but it seems not to Iran’s regime—so Iran is currently in the advantageous position.

In fact, the market has already responded to concerns about rising inflation and higher interest rates. The yield on US 2-year Treasury notes has risen from 3.385% on February 27 to 3.861% on March 25, and the yield on US 10-year Treasury notes has risen from 3.953% to 4.33%. Both increases are the highest levels since October 2024. The Tuesday auction of $69 billion of US 2-year Treasuries was also weak; the bid-to-cover ratio (the investment amount corresponding to each $1 of subscribed securities) was only 2.44, the lowest level since May 2024. Demand from direct bidders set an even weaker record since March 2025.

Asset outlook: a stock market rebound must wait for the oil price to peak

As for the chain reaction that a rise in crude oil prices might have on other asset prices, an Oriental Fortune Securities research report has sorted out several past oil crises and found that during the period when oil prices surged, the market’s keyword was “panic premium,” with asset pricing dominated by expectations of supply disruptions. But once oil prices hit their peak, the market’s pricing logic often switches—from a “supply shock” to a “demand contraction”—and differentiation within assets intensifies significantly.

Specifically, the report believes that during the phase of oil price surging, stock markets generally faced pressure. As for the bond market, it depends on which dominates: “recession worries” or “inflation-and-rate-hike expectations.” Also, the inflation base is a very important factor. Other commodity markets generally also rise in line with energy, though the strength of the increases differs. For example, urea, as a direct downstream of energy, shows a relatively strong linkage effect in the initial stage of the crisis: within 3 months after the crisis erupts, prices rise along with oil prices. In the past five times the oil crisis broke out, gold recorded gains in the 3 months following each outbreak.

After oil prices top out, the report argues that stock rebounds are the norm, but their sustainability is questionable. For example, after the high level of oil prices following the fifth oil crisis in 2022, the rebound in the US stock market was weak; the sustained suppression from the Fed’s aggressive rate hikes greatly reduced the positive effect of easing geopolitical risks.

As for the bond market, after oil prices top out, it usually enters a recession-based pricing logic. The squeeze from high energy costs on consumption pushes market expectations toward shrinking demand, making yield declines the main theme. For example, the third oil crisis in 1990 and the fourth oil crisis in 2003 are the most typical cases. Three months after oil prices were at high levels, the yields on 10-year US Treasuries fell by 62.8 basis points and 33.4 basis points, respectively. The bond market fully demonstrated the transmission logic: “oil prices top out → demand expectations deteriorate → price in rate cuts.” However, in a high-inflation or tight-monetary-policy environment, recession logic gives way to inflation logic, and yields do not fall—they rise. Three months after oil prices were at high levels in the 1978 second oil crisis, the yield on 10-year US Treasuries surged by 176.2 basis points; Paul Volcker’s tightening completely destroyed the bond market’s safe-haven function. After oil prices topped out in the fifth oil crisis in 2022, yields continued rising by 37.6 basis points; sticky inflation and the inertia of rate hikes together suppressed the bond market. Therefore, it can be seen that whether the bond market can develop a bull market after oil prices reach high levels depends on whether monetary policy has room for easing.

Regarding the specific impact of this US-Iran situation and the crude oil price shock on asset prices, the above report believes that the stock market faces pressure in the short term, and any rebound will need to wait until short-term oil prices have peaked or until the conflict situation becomes clearer;

the long end of the bond market is relatively bearish, and the short end fluctuates with the path of monetary policy. This time, the oil price shock layered with sticky inflation conditions is most similar to the situations in 1978 and 2022. On the long end, US Treasuries are more likely to fall than rise under re-acceleration in inflation expectations, making the probability of a bearish outcome relatively high. The short-end rates depend on the relative strength of growth and inflation data—if recession signals are clear, rate-cut expectations will push short-end yields lower; if inflation exceeds expectations, the short end will also face pressure.