Investment Review №340. The Bombshell Effect

An armed conflict pitting the U.S. and Israel against Iran broke out on February 28, triggering a sharp shock in the oil market. Brent crude spiked from $70 to an intraday high of $119 per barrel. Tanker traffic through the Strait of Hormuz—the key vein for roughly one-fifth of global oil flows—virtually halted. According to Kpler, while about 80 tankers typically transit the strait each day, only one did it on March 4. Even so, investors should size the risks appropriately in such volatile conditions: by March 10, Brent had fallen 12% to below $90 a barrel. As George Soros said, markets react to expectations and to shifts therein rather than to facts alone. With that in mind, I will unpack the nuances of the current crisis and explain why maintaining an optimistic investment stance remains warranted. 

First, the oil market entered 2026 with a surplus rather than a structural deficit: the IEA predicted a 4 million bpd overhang. On March 1, 2026, OPEC+ agreed to raise production by 206,000 bpd a day starting in April, but if the Strait of Hormuz is closed, that will not help—without transit through the Strait, producers still cannot deliver those barrels to end-consumers. 

Second, the military dynamics point to de-escalation. According to CENTCOM, coalition operations have destroyed more than 80% of Iran’s air-defense systems, over 40 warships, and more than 70% of its ballistic-missile launchers. Iran’s missile production and launch activity has fallen sharply, with the intensity of attacks reportedly down roughly tenfold for missiles and fivefold for drones. As of March 9, 2026, a handful of tankers, switching off their transponders, exited the Strait of Hormuz, albeit still in limited numbers.

Third, global strategic oil reserves are enormous: the U.S. holds roughly 1.68 billion barrels, the EU has about 0.93 billion, China – around 0.60 billion, and Japan plus South Korea hold approximately 0.36 billion. With effective re-routing of flows, the market could operate for roughly three months without reducing consumption. Tankers that departed before the conflict will continue arriving over the next couple of weeks, so there will be no immediate physical oil shortage. Moreover, Kpler reports that Iranian shipments surged ahead of the strike, with loadings nearing a record ~27 million barrels in the week of Feb 16-22—about 1.5x the average of the prior three months. This will satisfy demand from one of the world’s largest consumers, China. Furthermore, Washington has effectively allowed India, another major consumer, to continue purchasing Russian crude despite sanctions. While the United States, having become an oil exporter, are well positioned to overcome the crisis relatively painlessly.

Tail risks shouldn’t be dismissed: if the Strait of Hormuz stays closed for more than two months and the Iran-related conflict escalates into a broader regional war, Brent could spike to $120/bbl or higher. In that case, strategic reserve releases would be insufficient, demand in emerging markets would begin to erode, and global GDP could run 1.5-2% below the baseline. That said, I see the probability of this outcome as very low, so positioning should reflect that. Maintain partial exposure to U.S. oil and gas but avoid an aggressive overweight. And buy the dips: adding exposure to key Asian importers — South Korea (EWY), Taiwan (EWT), and Singapore (EWS)— should benefit under our base case of a quick de-escalation and minimal impact on the global economy.