Oil spread. What's wrong with oil prices?
Two Markets, Two Truths
When you Google the price of oil, you see the so-called paper price—Brent futures, currently around $95 per barrel. But if a country needs a real barrel to be loaded onto a real tanker and delivered to a real refinery, it costs over $130. The $35 difference is the largest gap in documented history. For comparison, even during COVID, when oil prices briefly went negative, there wasn't such a gap—and that was a demand collapse. Now, it's the opposite: a supply emergency.
The theory explaining this paradox is that the paper market is intentionally used as a psychological tool to reassure investors. Someone sells promises of oil at $100 without intending to physically deliver it. But when the contracts expire and the buyer says "where's my oil?", the seller will be forced to buy back the contracts at market price. If physical oil then costs $140, that's what they'll pay. This is called a short squeeze, and it can instantly equalize paper and physical prices.
How much oil has disappeared and who was hit first
The world consumes about 100 million barrels daily. Of that, 8 to 13 million are currently missing—that's like taking away half of the daily U.S. consumption. One energy fund analyst estimated that the world will lose a total of 780 million barrels during the conflict. The U.S. Strategic Petroleum Reserve holds 400 million barrels, and it was half-empty even before the war. So, the losses are twice the entire U.S. emergency stock.
Asia felt the impact first and most profoundly—80% of its oil came from the Persian Gulf, and now only about 6% of pre-war volumes pass through. The Philippines declared a state of emergency after fuel prices doubled. Indonesia and Vietnam switched people to remote work. In Thailand, the fishing industry is halting—marine fuel prices have increased by 250%. African countries are diluting gasoline with chemicals to stretch their remaining supplies.
The U.S. is last in line. JP Morgan points to a specific date: the last tanker that passed through the Strait of Hormuz before its closure is expected to arrive at its destination around April 20. After that, the buffer will be exhausted.
Lessons from the past
Three major oil crises provide a clear picture. In 1973, the Arab embargo removed 7% of the world's supply from the market—prices rose by 300%, the stock market fell by 52% over 23 months, inflation reached 12.3%, and recovery took 7 years. In 1990, a similar 7% dropped due to the Persian Gulf War—the market fell by 21% but quickly recovered because the war ended in a few months.
Currently, 15 to 20% of the world's supply is off the market—twice as much as in any previous crisis. The duration is already 7 weeks with no clear end. At the same time, the stock market is near historical highs and is pricing in a zero probability of recession or correction. It's worth remembering: in October 1973, after the ceasefire announcement, the S&P 500 rose by 2.3%. Then it fell by another 40%.
Bonds, Debt, and China
There's another signal that's hard to ignore. The yields on 10-year bonds for the U.S., UK, Germany, and Japan have increased since the start of the conflict. The American indicator is about 4.3%, the British is 5%. But Chinese yields have gone down. For the first time in 20 years, China has lower borrowing rates than all leading Western economies. In a crisis, money flows to China as a safe haven—and this is certainly not the scenario that was likely planned.
For the U.S., every additional percentage point in yield on a debt of about $40 trillion means billions of dollars in additional interest payments each year. The oil shock pushes inflation up, the Fed cannot cut rates, yields remain high, and the deficit grows. Economists have a name for this mechanism—a debt spiral of death.
Food and Energy Resources
Oil is not just gasoline. Natural gas, which also passes through the Strait of Hormuz, is the primary raw material for producing urea—the most common fertilizer in the world. Its price has already reached 2022 levels when the war in Ukraine caused a food crisis in dozens of countries. This price signal will reach supermarket shelves with a 6–12 month delay.
What's Next
A peaceful resolution remains possible, and then markets might absorb all of this relatively smoothly. But physical data, JP Morgan's statistics, bond dynamics, and 50 years of history point in one direction—while the official version and paper prices point in another. In every previous case, physical reality proved to be correct. The question is not whether these two lines will converge. The question is when.
Impact of the Oil Crisis on the US Dollar: Short-term and Medium-term Forecast
In the short term, the dollar is under conflicting pressures. On one hand, oil shocks traditionally stimulate demand for the dollar as a safe-haven currency—investors flock to American assets during times of uncertainty. On the other hand, this mechanism is currently failing: bond data shows that capital in this crisis is flowing not to the U.S., but to China. China's 10-year government bond yield is lower than America's for the first time in 20 years—meaning Beijing, not Washington, is taking on the role of a safe haven. For the DXY, this is a structurally negative signal.
Additional short-term pressure comes from the expected short squeeze in the oil market. When paper and physical oil prices converge—and JP Morgan points to late April as the moment the buffer is exhausted—inflationary expectations will rise sharply. The market will begin to re-evaluate the Fed's trajectory, and any hopes for rate cuts will vanish. This will temporarily support bond yields and could give the dollar a brief technical rebound. But this is not strength—it's a trap.
In the medium term, the picture looks significantly bleaker for the American currency. U.S. debt is approaching $40 trillion. The yield on 10-year treasuries at 4.3% already creates a serious burden on the budget, and the critical zone—4.6–4.8%—is not far off. The oil shock, which fuels inflation, deprives the Fed of room to maneuver: cutting rates will not be possible without triggering a new inflationary wave. Yields remain high, the cost of servicing debt increases, the deficit expands—and the cycle begins to feed itself.
Concurrently, food prices will rise—fertilizer prices are already increasing, and this will reach consumers in 6–12 months. A stagflationary environment, where inflation is high and the economy is slowing, has historically been one of the worst for the dollar: the Fed cannot act in either direction without side effects.
If we add to this the geopolitical re-evaluation of the dollar's role—when allies and trading partners observe the U.S. using currency and energy dominance as a weapon—the medium-term trend toward reserve diversification will only accelerate. The DXY may hold its position due to purely technical factors, but the fundamental wind is blowing against it.