Oil Markets Face Historic Supply Crunch

Oil prices pushed higher Sunday as the Strait of Hormuz remains largely blocked, with the waterway that once carried about 25% of the world's seaborne oil trade still effectively closed since late February when the United States and Israel launched an air war against Iran , according to MarketWatch. The Brent crude oil spot price reached a high of $138 per barrel on April 7 and averaged $117 per barrel for the month, with the U.S. Energy Information Administration expecting global oil inventories to fall by an average of 8.5 million barrels per day in the second quarter of 2026 .

Iran's blockade of the Strait of Hormuz has resulted in the loss of nearly a billion barrels of oil, with the shortage growing worse every day the sea lane remains closed , CNBC reported. According to market data, WTI crude traded at $71.50 per barrel on Friday, up 0.6%, while Brent crude stood at $75.20 per barrel, up 0.5%.

The crisis deepened Sunday when a drone strike sparked a fire on the perimeter of the Barakah Nuclear Energy Plant in the United Arab Emirates, with authorities in Abu Dhabi saying the blaze broke out at an electrical generator outside the plant's inner perimeter in the Al Dhafra region , Al Jazeera reported. No injuries were reported, and officials said radiation levels remained normal . The UAE has accused Iran of launching multiple drone and missile attacks in recent days as tensions have risen over the Strait of Hormuz , according to ABC News.

How Bad Could the Shortage Get?

The world is running out of oil—implausible three months ago, the likelihood of a crude shortage on a global scale is becoming increasingly realistic with each day that the Strait of Hormuz remains almost completely blocked , OilPrice.com reported Saturday. According to the May 2026 Oil Market Report by the International Energy Agency, global oil supply is projected to fall by 3.9 million barrels per day across 2026, with approximately 10.5 million barrels per day of Gulf oil production currently offline, while global oil demand will exceed supply by 1.78 million barrels per day in 2026 .

Aramco's chief executive Amin Nasser warned that global onshore inventories of fuels are depleting at record speed, saying these inventories are "the only buffer that is available today" but they are "materially depleted" , according to the Financial Times. JP Morgan's commodity analysts warned that by next month, commercial oil inventories in the developed world could "approach operational stress levels," with analyst Natasha Kaneva saying "our conclusion is that one way or another the strait reopens in June" .

The EIA assessed that Iraq, Saudi Arabia, Kuwait, the UAE, Qatar, and Bahrain collectively shut in 10.5 million barrels per day of crude oil production in April . The agency now assumes that the Strait of Hormuz will remain effectively closed through late May, with flows slowly starting to resume in late May or early June, though it expects it will take until late 2026 or early 2027 for most pre-conflict production and trade patterns to resume .

Can New Production Fill the Gap?

Amid the supply crisis, Santos announced first oil from the Pikka phase 1 development on Alaska's North Slope on Saturday, with oil flow established through the Lease Automated Custody Transfer meter into the Pikka sales oil line, with Santos operating the project and holding a 51 percent interest in the Pikka Unit while partner Repsol holds the remaining 49 percent . Pikka phase 1 has initiated production as part of the start-up and late-stage commissioning process that will lead to an initial ramp-up to 20,000 barrels per day over the next few weeks, with the project expected to reach a production plateau of 80,000 barrels per day during the third quarter , Reuters reported.

But even significant new projects like Pikka pale in comparison to the scale of the Middle East disruption. Producers outside of the Middle East pushed output higher and lifted exports to record levels in response to the crisis, with 2026 supply growth expectations from the Americas revised up by more than 600,000 barrels per day since the start of the year to 1.5 million barrels per day on average, while Atlantic Basin crude oil exports heading primarily to hard-hit East of Suez markets have increased by 3.5 million barrels per day since February, with notable gains from the United States, Brazil, Canada, Kazakhstan and Venezuela , according to the IEA.

Is Consolidation the Answer?

U.S. upstream mergers hit $38 billion in Q1 2026, marking the highest quarterly total in two years despite a sharp slowdown in March due to a spike in volatility tied to the Middle East conflict , OilPrice.com reported Saturday. The Devon Energy and Coterra Energy merger created a combined enterprise value of roughly $58 billion and gives the new company a dominant footprint in the Delaware Basin spanning West Texas and New Mexico, with Devon now projected to produce over 1.6 million barrels of oil equivalent per day, making the company the largest shale operator in the Delaware Basin , according to Enverus Intelligence Research.

The second big deal was Mitsubishi Corporation's acquisition of Aethon Energy Management's U.S. operations for $5.2 billion to purchase all interests from Aethon Energy Management and existing institutional backers, coupled with the assumption of $2.33 billion in net interest-bearing debt, with the assets spanning roughly 380,000 acres in the prolific Haynesville Shale formation across East Texas and Northern Louisiana producing 2.1 billion cubic feet per day of natural gas .

Governments and industry will prioritize energy security, with SLB CEO Olivier Le Peuch and Baker Hughes CEO Lorenzo Simonelli saying it is "no longer simply a talking point," according to Halliburton CEO Jeffrey Miller , CNBC reported. Exxon Mobil CEO Darren Woods said "obviously, people are going to reassess their energy security and how they ensure that, going forward, they don't have the same exposure" .

What Changed This Week

The oil market's trajectory shifted dramatically as the Iran war stalemate extended into its third month with no resolution in sight. The drone attack on the UAE's Barakah nuclear plant marked a dangerous escalation that threatens the fragile ceasefire, while Santos achieving first oil in Alaska provided a rare bright spot for non-OPEC production. Most significantly, industry forecasters abandoned hopes for a swift resolution to the Hormuz closure, with the EIA and IEA both extending their timelines for when normal oil flows might resume.

What to Watch

The EIA assumes that the Strait of Hormuz remains effectively closed until late May, with shipping traffic beginning to pick up in June, though oil shipments through the strait will not likely reach pre-conflict levels until later this year, with disrupted production leading to large oil inventory draws, particularly in May and June, limiting downward oil price pressures even after flows through the strait rise . The steepest inventory draws are projected to occur in May and June, helping to keep Brent crude prices elevated at approximately $106 per barrel , according to the IEA's May Oil Market Report.

Negotiations between the U.S. and Iran remain at an impasse, with both sides showing little willingness to compromise. While a conditional ceasefire is in place, almost no shipping has used the strait and it remains effectively closed , according to the UK House of Commons Library. The next major data release will be the EIA's June Short-Term Energy Outlook on June 9, which will provide updated forecasts on inventory levels and production disruptions.