Why Oil Price Spike May Trigger Supply Wave

Since the start of the West Asia conflict in late February, crude oil prices have been exceptionally volatile, reacting not only to developments on the ground but, at times, even more sharply to US President Donald Trump's social media posts. Spot and near-dated futures have experienced significant swings, while longer-dated contracts have remained comparatively stable. While the narrative of higher-for-longer oil prices has gained considerable traction, the futures curve suggests that markets remain relatively sanguine about the medium-term outlook.

Data from Bloomberg shows that since 27 February till the end of May, spot Brent prices have traded in a range of approximately $74 a barrel. In comparison, September 2026 and December 2026 Brent futures have traded within much narrower ranges of roughly $33 a barrel and $24 a barrel, respectively. Volatility in December 2026 futures has been less than a third of the volatility observed in spot prices. In other words, while markets acknowledge substantial near-term risks, they appear far less concerned about the longer-term implications of the current disruption.

There is certainly a case for such optimism. Market commentary has repeatedly highlighted that the rise in oil prices has been modest relative to the scale of the disruption. Increased US crude oil exports, weaker Chinese imports, inventory drawdowns and emergency stockpile releases have all helped cushion the immediate impact. Yet there is an equally compelling argument that the market may be underestimating the persistence of the shock. Chinese demand is unlikely to remain subdued indefinitely. Similarly, the roughly 14 mbpd of oil supplies disrupted from the Persian Gulf may not return fully or immediately even after hostilities cease. Demand-management measures adopted by consuming countries are also likely to be temporary. Taken together, these factors suggest that oil prices could remain elevated for some time even after the conflict formally ends.

However, there is another possibility that deserves greater attention. Ironically, today's oil shortage could lay the foundation for tomorrow's oil glut.

Shortage-Glut Cycle
Javier Blas, in a recent Bloomberg column titled An LNG Glut Is on Its Way, presents an interesting argument regarding the global LNG market. His thesis is straightforward: geopolitical shocks change investment behaviour. As he puts it, "everything outside Hormuz gets built." The current crisis has reinforced concerns regarding the concentration of energy infrastructure in the Persian Gulf. In response, governments and companies are likely to accelerate investments in LNG export terminals, import facilities and supporting infrastructure outside the region. This will occur in addition to the substantial capacity expansions already planned in Qatar and elsewhere in the Gulf.

The implication is that markets eventually respond to scarcity not only through higher prices but also through capacity creation. The question is whether the same dynamic could emerge in oil.

The current crisis has demonstrated the premium countries are willing to pay for energy security. Importers have sourced cargoes from far-flung markets at elevated prices simply to ensure continuity of supply. Security of supply, particularly after multiple years of geopolitical disruptions, now ranks above price optimisation for many governments.

This shift in priorities is already influencing investment decisions. The UAE has exited OPEC+ and is looking to increase crude oil production capacity to 5 mbpd by 2030. Discussions are underway regarding additional infrastructure to bypass the Strait of Hormuz and reduce dependence on a single maritime chokepoint. Higher oil prices, if sustained, will incentivise the highly responsive US shale industry to increase production. Projects that were previously considered uneconomical may become commercially viable. At the same time, an eventual end to major conflicts, including between Russia and Ukraine, could bring currently sanctioned or constrained barrels back into legitimate global markets.

The Reversal?
None of these developments would materially alter the near-term balance. Oil projects take time to develop. Infrastructure takes years to build. Production capacity cannot be added overnight. However, taken together, they point towards a potentially significant supply response over the medium term.

This possibility is often overlooked during periods of acute market stress. Historically, the cure for high prices has frequently been high prices. Sustained periods of elevated prices encourage investment, innovation and production growth. While every cycle is different, commodity markets have repeatedly demonstrated their ability to move from shortage to surplus faster than consensus expects.

That said, the near-term outlook remains challenging. Even if hostilities were to ease tomorrow, disrupted production and transportation networks would take time to normalise. Countries that have drawn down inventories will seek to replenish them. Strategic stockpile releases will need to be reversed. Temporary supply buffers, including SPR releases, commercial inventories and floating storage, will eventually be exhausted if disruptions persist.

The International Energy Agency announced an emergency release of more than 400 million barrels from government stockpiles shortly after the closure of the Strait of Hormuz, of which approximately 301 million barrels were crude oil. Meanwhile, US commercial crude inventories are estimated to be around 11% below their long-term average, while the Strategic Petroleum Reserve remains roughly 35% below historical levels. These buffers can buy time, but they cannot permanently replace lost production.

As inventories decline, market dynamics can become increasingly non-linear. Small changes in physical availability can result in disproportionately large price movements. In other words, the longer the disruption persists, the greater the risk of sharp price spikes. This risk becomes particularly pronounced if tanker traffic through the Strait of Hormuz remains severely constrained, limiting the market's ability to access available supplies.

Where crude oil prices ultimately settle is anybody's guess. In the immediate future, tight market conditions and elevated geopolitical risks are likely to keep prices supported. Yet investors should also consider the longer-term consequences of the current crisis. Every month of disruption strengthens the incentive to diversify supply routes, expand production capacity and reduce dependence on vulnerable chokepoints.

The irony is that the very forces driving oil prices higher today may eventually create the conditions for lower prices tomorrow. The near-term outlook may be one of scarcity and volatility, but the medium-term consequence could well be the re-emergence of excess capacity and, potentially, another oil glut.

* Views expressed are personal.