As of now, the Strait of Hormuz has effectively been shut since February 28, halting about 20% of global seaborne oil flows through this critical passage. The International Energy Agency called it “the largest supply disruption in the history of the global oil market.” Producers in the Gulf have curtailed nearly 9 million barrels per day, while U.S. gasoline prices have surged from $2.98 to above $4.00 per gallon.
Historically, shocks of this magnitude—1973, 1979, 1990—have delivered stagflationary blows severe enough to rattle markets. But after decades of observing market cycles, one lesson stands out: when price action refuses to validate a crisis narrative, it’s often because markets are factoring in dynamics that headlines overlook. That seems to be the case with Hormuz today.
Brent crude briefly spiked near $120 but has since eased to around $96, well below the $132 level projected by the Dallas Fed for a prolonged closure. Meanwhile, the S&P 500 continues to edge higher, and China—despite routing roughly a third of its crude imports through the strait—has remained resilient.
The real issue, then, isn’t why the worst-case forecasts missed the mark, but what they failed to account for—and where the true risks may now lie.
Why the Headlines Looked Worse Than the Reality
The “20% of global oil supply shut” narrative was always an oversimplification. In practice, the actual impact was cushioned by several key factors—each grounded in primary data and policy responses.
First, Gulf producers quickly rerouted a significant share of crude exports. According to estimates from Rystad Energy’s Tom Liles, around 5–6 million barrels per day could be diverted through pipeline networks in Saudi Arabia and the UAE, bypassing the Strait via outlets on the Red Sea and the Gulf of Oman. That’s roughly one-third of the region’s typical seaborne exports, reestablished within weeks rather than months.
At the same time, Iran quietly shifted from outright disruption to selective control. By late March, it allowed tankers from countries like China, Russia, India, Iraq, and Pakistan to pass. In effect, the “closure” functioned more as a rationing system than a complete blockade.
Second, strategic reserves performed exactly as intended. The International Energy Agency coordinated a record 400 million–barrel release, while the U.S. Strategic Petroleum Reserve alone contributed about 1.4 million barrels per day. As Bernstein analysts succinctly noted, the goal wasn’t to fully replace lost supply—it was to buy time. And it did just that, bridging the gap while alternative logistics ramped up and demand began to soften.
Third, China entered the الأزمة in a position of strength. Data from the U.S. Energy Information Administration showed commercial inventories approaching 1 billion barrels before February 2026, alongside an additional 360 million barrels in state reserves. That buffer equates to several months of imports, meaning Beijing had both the stockpile and the policy flexibility to weather disruptions—especially when paired with Iran’s selective transit allowances.
Taken together, these factors explain why the real-world impact fell far short of the initial shock implied by the headlines.
Finally—and most critically—the United States is structurally very different from what it was in the 1970s. Domestic crude output now exceeds 13 million barrels per day, providing a significant buffer against external supply shocks like those seen during the Arab Oil Embargo. In addition, LNG exports reached nearly 18 billion cubic feet per day in March, according to the EIA’s April Short-Term Energy Outlook. Less than 10% of U.S. crude imports pass through the Strait of Hormuz, meaning that in a global disruption, the U.S. acts more as a marginal supplier than a marginal victim.
Importantly, even the Dallas Fed’s worst-case scenario assumes the economic damage would be short-lived—limited to roughly one quarter, with an estimated 2.9 percentage point annualized drag on global real GDP. Current conditions appear much closer to the base-case outlook, which anticipated that rerouting, strategic reserves, and demand adjustments would absorb most of the shock. So far, that expectation has largely held true.
The Real Risk Lies on the Other Side
Here’s where the consensus may be misjudging the setup. If the bearish, crisis-driven oil narrative was overstated on the way in, the bullish case for oil at $96 may be equally overstated on the way out.
Once the Strait of Hormuz fully reopens, three forces are likely to hit the market simultaneously. Gulf producers could quickly bring back roughly 9 million barrels per day of shut-in supply, in line with EIA estimates. At the same time, tankers that have been sitting in storage will begin releasing cargoes, while U.S. shale—revitalized by prices near $95—continues operating at elevated output levels. Together, this creates a classic oversupply scenario.
The main counterbalance is the need to rebuild strategic reserves. More than 30 IEA member countries have drawn them down and will likely spend the latter half of 2026 replenishing stocks. Analysts at Kpler have pointed out that the back end of the oil futures curve appears undervalued, with late-2026 Brent priced around $74 compared to a fair value closer to $85.
That said, the direction may be right, but the scale could be off. Restocking demand will unfold gradually over several quarters, whereas supply can return within weeks. That mismatch is where the real risk of dislocation lies. A reasonable base case is for Brent to fall back toward the low $70s within about 90 days of a sustained ceasefire, with a meaningful chance of overshooting toward $60 if demand weakness—triggered by $4+ gasoline—persists.
This isn’t a call for a collapse in crude, but rather a recognition that the adjustment may be uneven. From current levels, upside appears limited, while the downside risk could be swift and pronounced.
The Market Has Already Pivoted to Earnings
It increasingly looks like markets have already absorbed the supply shock and moved on. Oil disruptions have been digested, and the focus has clearly shifted back to corporate earnings—and on that front, the data supports the bulls.
FactSet’s April 17 Earnings Insight shows that 88% of S&P 500 companies reporting so far have beaten first-quarter EPS expectations, well above the 10-year average of 76%. In aggregate, earnings are exceeding forecasts by 10.8%, compared to a historical norm of 7.1%. Looking ahead, analysts are now projecting around 18% earnings growth for full-year 2026. Barclays strategist Venu Krishna has already raised his 2026 EPS estimate to $321 from $305, while FactSet sees net margins reaching 13.9%—a record high. Earlier, Goldman Sachs highlighted this shift, noting that future index gains are likely to be driven primarily by earnings growth rather than multiple expansion.
Beyond that, the trend isn’t limited to 2026. Analysts are also revising 2027 earnings estimates upward, and at a pace that significantly exceeds historical norms.
That’s a genuinely constructive backdrop. Over time, equities tend to track earnings, and the strong Q1 beat rate points to real operational resilience. This isn’t a rally built on optimism alone—it’s being supported by actual results.
There are two important caveats, however.
First, forward earnings estimates almost always trend upward—until they don’t. Rising forward EPS is the norm during an expansion, not a uniquely bullish signal. What really matters is the turning point, and revisions typically roll over with a lag. As Goldman Sachs’ Ben Snider recently highlighted, much of the upward revision driving the S&P 500’s record levels has been concentrated in a narrow group of stocks, such as Exxon Mobil and Micron Technology. The median company in the index has seen minimal upgrades, suggesting this is a rally carried by a handful of leaders rather than broad-based improvement.
Second, valuations leave little room for error. The forward 12-month P/E ratio stands at 20.9—above both the 5-year average of 19.9 and the 10-year average of 18.9. At these levels, even strong earnings beats tend to generate only modest upside, while any disappointment—especially in forward guidance—can trigger sharp declines.
That makes the real test less about Q1 results and more about Q2 outlooks. If sectors like retail, travel, and discretionary begin lowering guidance as the impact of $4+ gasoline filters through consumer spending, forward estimates could finally start to roll over.
Until then, the path of least resistance for equities still appears to be upward.
How to Position From Here
I know not everyone will agree—and that’s fine. Markets exist because of differing views. But after decades of managing portfolios through shocks like this, here’s a practical way to think about positioning given the Strait of Hormuz dynamics and elevated equity valuations:
Don’t chase the oil rally.
Crude right now is being driven more by geopolitics than underlying fundamentals. At around $96, the risk/reward for going long looks unfavorable. If you’re already holding energy names that have rallied 40% or more, it may make sense to lock in gains rather than press further. Adding exposure here increases downside risk if the setup reverses.
Favor infrastructure over raw exposure.
Instead of betting on oil prices directly, consider energy infrastructure—midstream operators and LNG exporters. These businesses are less sensitive to spot price swings and tend to benefit from a global shift toward energy security. Their cash flows are generally more stable, even if Brent pulls back toward $70.
Respect equities—but don’t overextend.
With the S&P 500 trading around 20.9x forward earnings, markets are not pricing in much room for error. It’s reasonable to acknowledge the strength, but avoid chasing it. Rebalancing—trimming outsized winners back to target weights—can help manage risk without abandoning exposure.
Hold duration as a hedge.
U.S. Treasuries are currently reflecting expectations of solid growth. But if oil prices fall sharply and demand weakens, it could give the Federal Reserve room to ease policy. In that case, intermediate-duration bonds (“the belly” of the yield curve) would likely rally, providing a natural offset to risk assets.
Keep some cash on hand.
Markets across equities, oil, and credit seem to be pricing in a smooth resolution to the conflict. If that assumption proves wrong—whether due to a breakdown in ceasefire or a supply glut hitting before restocking demand builds—liquidity becomes a strategic advantage. Having dry powder allows you to respond when dislocations create better entry points.
Overall, this is less about making aggressive bets and more about managing asymmetry: limited upside in crowded trades versus potentially sharper downside if the narrative shifts.
Bottom line: The market’s calm around the Strait of Hormuz is justified, and the focus on earnings is warranted. But the risk hasn’t disappeared—it has shifted. Instead of an oil price spike, the bigger threat may now be an oil downturn, and instead of geopolitics, attention turns to equity valuations. Both sides of that equation require active management, not complacency, even if markets appear steady.
THE ETERNAL SOVEREIGN 
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