In our last weekend opinion piece “Brent might cross 100 next week” we had estimated oil flows through the Strait of Hormuz are down 18mb/d, which corresponds to around 10% of normal levels, even below our pessimistic 15% assumptions. Today, International Energy Agency's has decided to release 400 million barrels of oil available to the global market, but we believe this will not be enough. This release of 400 million barrels might happen over next 180 days implying a 2 mbpd run rate in the most optimistic scenario. This compares to the current 18 mbpd loss run rate through SoH (Strait of Hormuz). Since the war started on 28th Feb, SoH is effectively closed implying already a loss of 180 million barrels app. If the SoH remains closed for another 1 month, which is our base case scenario, it implies a loss of 450 million barrels. Hence total global markets might have lost 600 million barrels as an immediate supply shock whereas the IEA release might come over next 6 months. Hence Brent prices are likely to now remain between 85-150 for next 1 month as long as SoH remains closed. We believe with the US SPR at around 415 mb—58% of capacity—and site modernization work ongoing, operational flexibility is likely to be far lower than before the 2022 drawdown of 180 MB though US has announced it will release 172 MB in today's IEA plans. Realistic US SPR releases today are likely below the 1.0 mbd pace averaged in 2022 because inventories are lower and salt cavern integrity and deliverability constraints cap withdrawal rates. There are also limits on how far inventories can be reduced. Congress mandates a minimum SPR level of 252.4 million barrels, which it can adjust, as it did in the 2021 Bipartisan Infrastructure Bill. The key question is how long does the war last. We believe that the war has already diverged from the strategy Washington and Jerusalem expected. What began as a short, coercive campaign aimed at regime collapse is turning into a contest of endurance—one Iran believes it is better positioned to win. Iran interpreted the campaign not as a nuclear containment operation but as an existential regime-change effort. That perception produced a radically different Iranian strategy: refuse a short war and instead extend the conflict until U.S. political and economic tolerance erodes. Iran is fighting for the 15th round, while Washington planned for one or two. Even if Trump declared victory and halted operations, we doubt Iran would reciprocate. Tehran’s goal is not simply a cessation of bombing but a new regional settlement that removes the conditions for repeated U.S.–Israeli strikes. Hence, Iran wants a deal, not a pause. We believe Iran has a higher tolerance for pain. Iran believes it can endure economic and physical damage longer than the United States can tolerate sustained economic disruption. If that assumption proves correct, Tehran hopes to emerge with greater bargaining leverage when negotiations eventually begin. For all the above reasons, we believe the current standoff is a long-drawn offer which in the best case takes one more month and worst case could continue till June. In both scenarios, IEA release is not sufficient for supporting crude prices. We now see a range of 85-150 for the next 1 month on Brent. Even in a best-case basis, the geopolitical risk premium of $15-20 might always remain embedded to the fair value of $65 for Brent.
