Muzinich Weekly Market Comment: Energy Shock
Insight
March 16, 2026
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The conflict across the Middle East continued to dominate this week, with price action and sentiment moving almost in lockstep with oil prices. Oil itself faced an unenviable task, absorbing a relentless stream of headline-driven volatility in an extraordinarily fluid news environment. The result was a single-day trading range of US$35 per barrel, the largest nominal intraday range on record since Bloomberg began tracking intraday oil futures data in the 1980s.
The importance of oil prices to the global economy cannot be overstated, as virtually everything depends on energy to function. A broadly neutral price range of US$50–US$70 per barrel tends to keep the economic impact benign. However, when prices rise above this range, energy acts as an economic brake - the cost of doing business increases, consumers' real incomes fall, inflation expectations climb and central banks tend to tighten financial conditions. Conversely, when prices fall below the bottom of this range, cheaper oil acts as an economic accelerator, easing costs across the board and boosting spending power. For example, with oil prices rising 66% (from US$60 to US$100 per barrel), the Federal Reserve's DSGE (Dynamic stochastic general equilibrium) oil price shock model estimates that headline inflation would increase by approximately 1% on a 12-month basis, while the drag on growth would be around -0.5% over the following 12 to 24 months.1
Yet despite oil’s enormous economic importance, predicting where prices will go is notoriously difficult. As John Kenneth Galbraith once quipped, “The only function of economic forecasting is to make astrology look respectable”. Nowhere is that truer than in commodities – and especially oil – markets. Prices here are hostage to supply shocks no one sees coming, demand shifts we can barely measure and speculation we don’t fully understand. Oil sits at the intersection of geology, geopolitics, economics and human psychology; an unruly mix that makes reliable forecasting extraordinarily difficult.
So, for investors, the key questions right now are: how large is the energy supply shock, what can be done to minimize the shortfall and what are the tail risks to the consensus?
The US and Israel hold clear military superiority, while Iran's advantages lie in endurance and geography, with the Strait of Hormuz (SoH) the critical energy chokepoint now at the heart of the conflict. In February, oil exports transiting the SoH from Iran, Iraq, Kuwait, Saudi Arabia and the UAE totalled 18.53 million barrels per day (mb/d), excluding refined products.2 More recent real-time estimates, based on reported vessel counts, show flows have fallen by 19.4 mb/d to 0.6 mb/d on a 4-day moving average.3 This compares to the widely cited consensus estimate of approximately 20 mb/d of total petroleum liquids transiting the Strait.4
In our view, the first potential relief lever is rerouting supply from seaborne to pipeline transit. Saudi Arabia could theoretically redirect a further 6 mb/d through pipeline, while the UAE has an additional 0.7 mb/d of rerouting capacity.3
The second relief valve is strategic reserves. The International Energy Agency (IEA) has stated that its 32 members hold more than 1.2 billion barrels in emergency stockpiles and the G7 nations and IEA member countries have indicated they would organize the release of up to 400 million barrels from emergency reserves in the coming days.5 The critical variable, however, is the speed of release. Historically, the highest sustained release rate has been around 1.4 mb/d3 but given the scale of the potential supply shock faced by energy markets, we assume this increases to 2 mb/d.
The third and most speculative source of relief is the so-called shadow oil fleet. Following the tightening of sanctions on Russian oil through August–September 2025, a significant volume of crude became stranded on the water as tankers struggled to find compliant buyers. Estimates suggest approximately 200 million barrels of excess floating inventory could re-enter the market relatively quickly as sanctions relief is granted.6 Speed of release is, again, debatable, but we assume approximately 2 mb/d could realistically come to market.
Finally, and perhaps most controversially, would be the continuation of exports by Iran, albeit likely at a more constrained level than before the conflict began. We are revising down the 2.2 mb/d exported in February to an assumed 1.5 mb/d.2
So, in aggregate, the emergency measure would still leave a net supply shock to energy markets of approximately 7.2 mb/d (see Chart of the Week).
The next challenge is estimating how long the supply shock will last. Taking an overview of prediction markets, the oil forward curve, and options markets to glean the consensus estimate, the picture is consistent – markets do not expect the disruption to last longer than three months. The probability of a ceasefire being announced before June 30th stands at 61%.7 The oil forward curve is in steep backwardation, with prices below US$100 per barrel from the second month out, falling to US$75 at the twelve-month point.8 Options markets are assigning just an 8% probability that oil will be above US$100 by the end of May.3
Based on our previous econometric analysis,9 a four-quarter moving average change of 1 mb/d in inventory corresponds to an approximate US$12 move in oil prices. Accordingly, a one-quarter disruption of 1 mb/d would equate to roughly a US$3 move in price. Putting this together, investors are currently pricing in a bear-case scenario for oil – either they are pessimistic on the size of the supply shortfall or on the duration of the shock (see Chart of the Week). Note that for the pessimistic scenario, we reduce pipeline supply from the theoretical maximum to known capacity, slow the pace of strategic reserve releases to historical norms and assume a full halt to Iranian exports. The base price for Brent is the year-end 2025 level.
A rational explanation for why oil recorded its largest single-day range this week, and why volatility is expected to remain elevated in the coming days, is that tail risks on both sides are significantly amplified. The negative left tail centres on the longevity of the conflict and, more broadly, the risk of energy infrastructure damage and production shut-ins across the Middle East, alongside growing constraints on reopening the SoH, including the threat of shipping mines and drone attack capabilities. Our most pessimistic output suggests that Brent oil will rise to US$136 per barrel, under a sustained stream of negative developments, it’s reasonable to project Brent oil testing US$150 per barrel levels.
For the positive right tail, it is all about speed. The IEA has stated that it is theoretically possible to release up to 12 mb/d from collective strategic reserves;10 even half that rate would put a significant dent in the size of the supply shock. Meanwhile, apart from Iran and possibly Russia, it is in virtually everyone's interest for this conflict to conclude swiftly. The US Administration faces midterm elections in November, and prediction markets have raised the odds of Democratic control of both the House and Senate to 48%, a 10-points jump from the end of February.7 Meanwhile, the President, who has tended to use financial markets as a gauge of policy success, will likely be deeply disappointed by the market reaction thus far.
The positive tail is also watching for evidence that the US can successfully partially reopen the SoH. It has been announced that Chubb will serve as the lead underwriter for a US government programme to provide insurance to ships transiting the strait. At the same time, Energy Secretary Chris Wright has stated that the US Navy will begin escorting oil tankers through the SoH by month end.11 For context, a VLCC (Very Large Crude Carrier) transports approximately 2 million barrels, while a Suezmax carries around 1 million, so even a handful of successful escorts per day could meaningfully restore supply flows.
If one of the positive tail risks is triggered, we look to the forward oil curve for guidance, Brent is priced 12-months forward at US$75 and 24-months out at US$72. On a string of good news, it is reasonable to project Brent oil testing US$70 per barrel.
Chart of the Week: Oil Supply Shock
Source: Bloomberg as of March 13, 2026. For illustrative purposes only.
All sources are Bloomberg unless otherwise stated.
Past performance is not a reliable indicator of current or future results.
References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.
References
1. The Federal Reserve, FEDS Notes, “Oil Prive Shocks and Inflation in a DSGE Model of the Global Economy,” August 2, 2024
2. Bloomberg, as of March 13, 2026
3. Goldman Sachs Commodities Research, “Oil Tracker: Hormuz Disruptions,” March 10, 2026
4. Standard Charter Research, “Strait of Hormuz—Assessing trade exposure,” March 9, 2026
5. Bloomberg, “IEA Proposes Massive Release of Energy Oil Stockpiles,”
6. BofA Global Research, “Global Energy Paper, Medium-term oil outlook,” February 9, 2026
7. Bloomberg, as of March 13, 2026
8. Bloomberg, as of March 13, 2026
9. Muzinich & Co., “EM Monthly: Black gold,” March 11, 2025
10. International Energy Agency, Insights Series 2018, “Costs and benefits of emergency stockholding,” October 2018
11. Washington Examiner, “Chris Wright says US aims to escort tankers through Strait of Hormuz by end of month, March 12, 2026
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