Oil is surging again as market pros warn of 'cascading damage' to energy markets

• Doomsday scenarios for the oil market are on back on the table as the Iran war re-escalates.
• Forecasters say the bottleneck has renewed fear of a supply shortage that sends prices spiraling.
• Oil experts are looking at refining spreads, one signal that could precede more volatility.

It was only a few weeks ago that markets considered the worst-case scenario for oil to be off the table. The US and Iran had reached a preliminary peace agreement. Oil prices, the key flashpoint of the Iran war, were falling rapidly. All seemed to be going well.

That's no longer the case, energy forecasters say, with crude prices surging again as fighting in the Middle East resumes and confidence has broken down in a resolution between the US and Iran. Now, energy markets are looking at the same dire outcome they saw earlier in the year: a supply shortage that could send prices spiraling higher, weighing on businesses and the economy.

Oil prices surged again on Wednesday as traders absorbed the latest developments. Brent crude, the international benchmark, jumped nearly 4% to $94.25 a barrel and US crude rose 3% to $87, as the US conducted its 11th round of strikes against Iran and State Secretary Marco Rubio said that Iran was "not serious about talks."

Brent broke through the $90 seal for the first time in weeks on Tuesday after President Trump said Iran would pay "many times over" for attacks that killed US soldiers over the weekend, and that the military would bomb Pickaxe Mountain, an Iranian underground nuclear facility.

Gas prices also jumped past $4 a gallon on Monday, reflecting how consumers are already feeling the pain of the latest price surge.

Torsten Sløk, the chief economist at Apollo Global Management, said his team is watching for the risk of "non-linear cascading damage" in energy markets, largely due to an emerging chokepoint in the world oil supply chain. Crude flows through the Strait of Hormuz have plummeted back to near-zero, he wrote in a client note on Wednesday.

The US, meanwhile, has significantly depleted its oil reserves. Stocks in the US's Strategic Petroleum Reserve fell to 3.1 million barrels in the last week, the lowest level recorded since 1983, according to data from the Energy Information Administration.

Sløk pointed to wider crack spreads, or the difference between the price of crude and refined petroleum products. Wider spreads suggest that profit margins for oil refiners are increasing, which lifts demand and contributes to the tightness in supply.

"The real tail risk emerges if inventories at critical nodes like airports or power plants suddenly run dry," Sløk said.

HFI Research, a contrarian energy investment research firm, doubled down on its thesis that oil prices could soar as high as $150 a barrel, topping Brent's peak during the Great Financial Crisis.

The firm also pointed to wider crack spreads as one precursor of future supply tightness. The 3-2-1 crack spread — an industry benchmark that reflects refiners' profits from refining 3 barrels of crude into 2 barrels of gasoline and 1 barrel of distillate fuel — is at a record $70 per bundle, equivalent to around $23 per barrel, the firm wrote in a Substack note last week.

Spreads that high suggest both oil and oil products are "mispriced," the firm said. For comparison, the 3-2-1 spread clocked in at around $27 per bundle, or $9 per barrel in July of last year, according to data from RBN Energy.

"The market, the efficient part at least, has been screaming that we have a product shortage," HFI wrote in a Substack note last week.

Flows coming out of the Strait of Hormuz have slowed "to a trickle" in recent weeks, the firm said. It speculated that the bottleneck would be felt more acutely this week, leading to a "natural upward trajectory" in oil prices.

Brent hitting $150 a barrel would imply another 68% increase in price.

"At today's refining margins, we are already at $150/bbl. The very thing that the US is trying to prevent is happening regardless," the firm wrote.

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