Oil prices are up by over 50% since the end of February, ready for further gains should the situation in the Middle East deteriorate again. Supply is tight and getting tighter by the day.
A fifth of global LNG supply is offline.
The energy sector is once again hot, and commentators are talking about a new supercycle. Investors rushing to oil and gas stocks would be unsurprising, but perhaps some caution is advisable.
Oil prices have made significant gains since the start of the year as the February 28th U.S. and Israeli strikes on Iran and the subsequent closure of the Strait of Hormuz by Iran flipped the oil script overnight, from a “massive” glut to a deepening shortage. This looks like the perfect time to expand in the oil space: prices are up, supply is down, and this state of affairs will continue for at least six months, according to analysts.
Yet, price volatility these days is not the price volatility from thirty years ago. Nowadays, with automated trading, prices can dip and soar on a literal social media post and have often done just that over the last six weeks as President Trump took to his platform, Truth Social, to make announcements about the war. Indeed, Trump’s posts have had greater immediate impact on oil prices than factual reports about the state of supply.
This is an important factor to consider in investment decisions for this commodity supercycle. Another factor to consider, according to Reuters’ Taosha Wong, is the size of the commodity market.
Wong noted in a column this week that the commodity market is small, compared to stocks and bonds, and the redirection of cash flows from financial assets to commodities could have a significant impact on prices—not necessarily favorable for investors because “A relatively small market can absorb only so much new capital before price adjusts.”
Of course, there are always energy stocks and, to be more specific, Big Oil stocks. Hated by many who prioritize net-zero over returns, favored by those who prefer their investments traditional, generating returns, Big Oil has enjoyed a pretty good month. Share prices are up, so are prices, and BP just reported “exceptional” performance in its trading business over the first quarter of the year.
Yet that very same BP also warned that its net debt at the end of March had moved higher than it had been at the end of December 2025, seen at between $25 and $27 billion, from $22 billion at the end of last year. The reason for the rise was the higher need for working capital amid the war-related price volatility.
There are also commodity traders that lost billions from their failure to anticipate the impact of the war between the U.S. and Israel, and Iran. Because the scenario with Iran closing the Strait of Hormuz for tankers has, for years, been considered highly unlikely, no one planned for it. As a result, commodity traders suffered billions in losses because they had bet the wrong way on oil prices.
“For most participants the situation was a surprise,” said Alexander Franke, head of risk and trading at Oliver Wyman, which recently released an analysis of commodity traders’ recent performance. “Before the war started, there was a strong conviction in the market that prices would fall, and because of the war, they spiked,” Franke explained, as quoted by the Financial Times.
Yet it wasn’t just the wrong bets on financial markets that made commodity majors suffer. They were also caught short by the very literal squeeze on supply that the war caused—and they had to find cargoes to replace that lost supply because they had contractual obligations with clients. That replacement, as the FT noted in its article, came at a steep cost. Again, this was the least expected scenario.
There is one more factor detailed by Reuters’ Wong that would be worth considering. Positive convexity, originally referring to bond prices and how they tend to rise when yields fall more than they fall when yields rise, could also be applied to oil and gas. Because oil and gas are physical commodities, and moreover, they are vital commodities for any economy, any disruption in supply would immediately lead to higher prices, Wong explains. In her own words, “Price upside is often much larger than downside.”
Still, markets turn on a dime or a social media post. This week, for instance, oil prices have actually declined despite the fact that a U.S. naval blockade on Iranian tanker traffic would mean even tighter global supply, which should be bullish for prices. But prices are weakening on hopes—hopes that talks would resume and result in peace, even if the physical supply problem would take months to solve. But markets, after all, are not a rational place.
