CONTRIBUTORS
Sam Peters, CFA
Portfolio Manager
Key takeaways
- The Strait of Hormuz disruption is a classic information-rich shock, driving extreme oil volatility and forcing markets to reprice growth, inflation and recession risk as the duration of the supply shock becomes clearer.
- Markets are still pricing a relatively quick resolution, but forward curves are shifting higher, suggesting oil is unlikely to revert to prior levels and that prolonged disruption would materially increase stagflation and recession probabilities.
- The investment opportunity set is evolving alongside commodity markets. We believe market leadership will continue to broaden and that the ongoing bull market in real assets will be reinforced by this crisis.
Calibrating surprise through oil
The current conflict with Iran, and the effective closing of the Strait of Hormuz, is the year’s first big “information-rich” event—a surprise that introduces a shock of uncertainty the market must price over time as new information reduces uncertainty. The defining characteristic of these events is a large spike in volatility, which will ultimately result in price discovery at a level that reflects the new information.
Information-rich events are typically good tests of portfolio construction and often require some level of adaptation. They also create new opportunities, typically in the form of exploitable risk premiums and behavioral errors resulting from overreactions or underreactions. We are observing some elevation in risk premiums, with the market’s underreaction to changes in energy and commodity markets offering attractive forward return opportunities.
The best way to measure surprise events is with volatility. With the latest Hormuz crisis, the best gauge is the CBOE Crude Oil Volatility Index (OVX), which has registered the second-largest oil volatility event on record, surpassed only by the demand collapse during the COVID-19 pandemic when oil prices briefly hit negative levels in Spring 2020.1 At its peak, the OVX reached 120, implying daily moves in the oil price of roughly 8%. This level of volatility is not sustainable and has already begun to fall as uncertainty has waned.
Exhibit 1: Hormuz Closure Results in Historic Volatility
Sources: Bloomberg. As of March 18, 2026.
The critical unknown variable is the duration of the Strait closure. This is important as the closure has the potential to be the largest oil supply shock in history. Currently, an estimated eight million barrels per day (mmb/d) are offline according to the International Energy Agency,2 largely a function of storage filling behind the Strait. Analysts estimate the supply shock could approach or exceed 10 mmb/d within weeks, a disruption that cannot be offset by Strategic Petroleum Reserve (SPR) releases—which could optimally cover roughly four mmb/d—or a quick supply response.
If this situation is not resolved within the next couple of weeks, global oil inventories will decline toward historic lows and prices would need to rise to induce demand destruction. The critical level is when global consumption exceeds 4% of global gross domestic product (GDP), roughly US$150 oil, which would raise recession probabilities materially, increasing US recession odds from approximately 20% pre-Iran and above the roughly 31% we are currently observing.
The market is not pricing a drawn-out crisis. Both the oil forward curve and volatility curve remain in steep backwardation—reflecting a sharp spike in spot prices with expectations for normalization later in 2026. However, the forward curve continues to move higher as the closure persists, signaling oil is unlikely to revert to US$60 levels, but will instead settle higher depending on the timing of a resolution.
Positioning to persevere through volatility
We are evaluating three scenarios as events unfold:
- Near-term resolution (~30% probability, declining): Strait reopens within two weeks, cumulative drawdown of supply of 20 million to 40 million barrels, minimal structural damage, and oil settles in the US$70–US$75 range in the second half of the year.
- Extended disruption (~60% probability): Closure lasts four to eight weeks, drawing 300 million to 500 million barrels, exhausting the SPR and pushing inventories to multiyear lows. Oil stabilizes in the US$80–US$95 range into 2027 with signs of structural damage.
- Tail event (~10% probability): Conflict extends into early summer or beyond, resulting in structural damage, continued closure and cumulative draws exceeding one billion barrels. Oil spikes toward US$200, forcing demand destruction, with prices remaining above US$100 for an extended period as markets rebalance.
Probability-adjusted outcomes suggest oil prices settle above US$70 but quickly escalate as a function of time.
These dynamics are increasingly central to portfolio construction and adapting to be more resilient to volatility spikes, which have recently been characterized by extremely fast ascents and equally fast normalization, with limited expansion in exploitable risk premiums. One approach has been to reduce exposure to high-volatility, high-correlation assets, lowering downside during spikes, offering investors opportunities to play offense more quickly and add to names that may be well positioned when the crisis abates.
At the same time, the opportunity set is evolving alongside commodity markets. We believe market leadership will continue to broaden and that the ongoing bull market in real assets will be reinforced by this crisis. One of the key benefits of a sizable positioning in real assets is that commodity return tails are symmetric—downside from demand shocks like COVID-19 and upside from supply shocks like Hormuz—providing diversification against the structural left-tail skew from long equity exposure.
Energy fundamentals are also improving meaningfully, in our view, with cash flow and earnings estimates seeing positive revisions. We expect energy to continue to lead the market in 2026. However, the most constructive outcome for energy equities is a quicker resolution, as energy stocks typically perform better when prices stabilize at higher levels—the most likely current outcome—rather than during acute price spikes.
EndNotes
- Source: US Energy Information Administration. As of January 5, 2021.
- Source: Key facts on the Strait of Hormuz, oil and gas markets, and the IEA's response." International Energy Agency. March 2026.
DEFINITIONS
The CBOE Crude Oil ETF Volatility Index (OVX) is an estimate of the expected 30-day volatility of crude oil as priced by the United States Oil Fund (USO).
The Strategic Petroleum Reserve (SPR) is an emergency stockpile of petroleum maintained by the United States Department of Energy.
A left-tail skew (or negative skew) is a distribution type where the left tail is longer or larger than the right, with the bulk of data values clustered on the right.
A risk premium is the additional return an investment is expected to provide over a risk-free rate (like government bonds) to compensate an investor for taking on higher risk.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. No assurance can be given that any forecast, projection or prediction regarding economies or financial markets will be realized.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
To the extent the portfolio invests in a concentration of certain securities, regions or industries, it is subject to increased volatility.
Diversification does not guarantee a profit or protect against a loss. Dividends may fluctuate and are not guaranteed, and a company may reduce or eliminate its dividend at any time.
Companies in the infrastructure industry may be subject to a variety of factors, including high interest costs, high degrees of leverage, effects of economic slowdowns, increased competition, and impact resulting from government and regulatory policies and practices.
Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner.
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