Key Highlights

• Shipping constraints slow market normalization
• Product prices pressure CPI quickly
• Defensive positioning persists amid uncertainty

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Defensive and waiting

Markets are likely to focus on oil tanker availability and refining capacity in the months ahead as investors balance inflation risks against demand destruction. The full economic shocks of the U.S.-Israel-Iran conflict remains unclear. One of the issues will be related to costs for gasoline, jet fuel and diesel. How long crude oil stays above $80/bbl matters, as does the pace of price change, which is driving volatility across asset classes. Investors are likely to remain defensive longer than the conflict remains hot. The consensus view is that the U.S. will end the conflict as soon as possible – four to five weeks maximum, with oil returning to $55 to $60.

The release of some strategic petroleum reserves and the waiver on Russian oil sales to India helped calm supply worries, if only temporarily. Whether the consensus holds depends as much on Iran and Israel as on the U.S. Market volatility and the drawdown in munitions adds further uncertainty. For the next two weeks, investors are likely to wait rather than act. Quarter end brings rebalancing pressures, rising borrowing demands, buyback interest, and lingering AI and credit concerns – all overshadowed by the conflict and the energy price shock.

When do energy cost rises move from inflation to demand destruction?

EXHIBIT #1: JET FUEL, DIESEL AND GASOLINE PRICE MOVES SINCE FEBRUARY 28

_{Source: BNY, Bloomberg (CME and Singapore Exchanges)}

Our take

Most economic models estimate that a sustained $10/bbl increase in oil prices adds 0.2% to CPI. The knock-on effect to gasoline prices is fast – typically within one to two months. Other effects to food, chemicals and other high energy products take two to three months or more.

Gasoline accounts for about 3% to 4% of the CPI basket; airfare roughly 1%, with jet fuel making up around 30% of airline operating costs; and public transportation, which runs mostly on diesel, another 1%. The net effect of the Middle East conflict is linked not to crude but to the higher costs of oil products. The sharper rise in jet fuel prices partly reflects the war’s direct impact on aviation.

Interest rates add another layer. Markets are generating a negative feedback loop: higher mortgage costs, trade finance, and borrowing amplify the price shock. This should eventually drive demand destruction and lower prices, but the timing is central bank dependent. The 25bp rise in bond yields triggered by the war should reduce CPI by 0.15% within two quarters.

The 2022 Russia-Ukraine playbook also breaks down here – the current economic cycle is too different to map directly.

Forward look 

The cost of the war on affordability will remain a political issue through the summer. Politics will increasingly shape investment outlooks, with the conflict dividing domestic U.S. support and sharpening fears around shifts in the House and Senate. Much of this will be linked to energy prices.

But the chilling effect of energy price volatility on corporate decision-making is underappreciated. War risks and costs have curtailed travel, rate spikes have paused new project financing, and rising VAR shocks are slowing new risk-taking. The performance hit from the war reduces market liquidity, as volatility demands more margin and cash, and buyers will stay sidelined until there is sufficient certainty or discount to draw them in. Mean-reversion trade expectations also look vulnerable heading into next quarter – iFlow data suggest flat rather than short positioning. The next move in risk up or down will remain linked to the duration and extent of the conflict.

Global oil fleet size and use is under appreciated

EXHIBIT #2:  GLOBAL OIL TANKER FLEET: COUNT AND CAPACITY

_{Source: BNY, IEA, Clarkson}

Our take 

China controls the largest share of global oil tanker capacity at around 30%. Norway, the U.S. and Saudi Arabia account for roughly 20%, while the remainder is opaque, obscured by sanctions and Russia’s shadow fleet.

Oil markets will depend on the ability to move surplus GCC crude to global refineries to address product shortages. Price action over the past week has been frenetic, swinging from bullish to bearish and back, with 5% to 10% moves becoming “normal.” Whether the Strait of Hormuz can be kept open to oil, gas and other cargo remains in doubt.

Offshore storage capacity has shaped inventory dynamics since the start of 2026 – an estimated 1.8bn bbl of oil is in transit or waiting offshore, with sanctioned and shadow fleets accounting for a significant share. Pre-war, oil vessels moved an average of 20mb/day – a capacity ceiling that constrains how quickly GCC supply can reach global markets. On the demand side, 825 operational refineries, concentrated in Asia and the Americas, process 80mb to 95mb a day, depending on crude type.

Forward look 

If the markets want to get back to “normal” there will be three issues to consider.

First, insurance costs and shipping rates need to fall to levels that make it economically viable to move oil and products again. With shipping capacity utilization at 92%, there is little room to move excess crude. The 350mb that can theoretically be moved will take far longer than markets have priced in. The round-trip voyage from the GCC to Asia is usually 45 days.

Second, how much supply is actually available to fill the gap? GCC onshore and tanker inventory is not fully visible, but consensus puts it near 800mn bbl. The use of pipelines to get oil to safer shipping zones (Red Sea or outside the Strait of Hormuz) by Saudi and UAE will help. Some expect this would reduce the current 10mb/day supply shock to 4mb/day. IEA releases are expected to add another 3mb/day supply, though crude quality and type will create downstream refining constraints.

Third, getting crude products to a new equilibrium is a matter of math and time. Part of the equation is the recovery of the GCC as an airline hub, since airfreight and passenger aviation are key drivers of jet fuel demand. Finding the right product mix across diesel, gasoline, LNG and jet fuel will take time and depend partly on regional refining capacity and natural gas output.

Net, the best estimate for a return to $60/bbl is three to five months – a timeline that may not align with mid-term election pressures. There is no fast path to filling refinery product needs while the conflict continues. 

Is the time to get back to “normal” more than a quarter?

EXHIBIT #3: ENERGY EQUITY HOLDINGS, REFINERY COUNT AND COMPLEXITY

_{Source: BNY, Fitch, Baker Institute}

Our take 

Not all oil is the same. The SPR of the U.S. (estimated at 410mb) is light sweet crude that is appropriate for fast gasoline and jet fuel production. Refineries are scored using the Nelson Complexity Index. A score above ten indicates the ability to process a wide range of crude types – India has a refinery scoring 21.5, while some EM Asia facilities score as low as one, limited to simple conversion. Of the 825 operational refineries, roughly 100 are too simple or too old to function at capacity – a hard constraint on any return to normal.

Refining is itself energy-intensive: efficient facilities consume around 5% of their own output in processing, with less efficient ones approaching 10%.

Forward look 

The broader impact of an energy supply shock on global markets looks underappreciated. The most energy-intensive industries – chemicals, refining, metals, paper, mineral products, cement and food – face the sharpest margin pressure, and new demand from data centers and battery and semiconductor manufacturing only adds to the load. iFlow holdings show Industrials running 12% above their 10y average and Materials 17% above. Investors look vulnerable to a second order energy shock on profits for many businesses. The effect of such will be further de-risking. The most overheld sector globally is EM Energy, with LatAm leading by region. The other notable risk will be in finding alternatives to current rare-earth supplies as new efforts to replace China dependence require more energy. The feedback loops for equities circle back to AI investment, data centers and semiconductors as the macro underbelly of an extended supply shock. 

Bottom line

The role of oil in portfolios has been exaggerated with investors buying energy companies as a hedge. The war rotation trade in our flows – long energy, materials and select industrials, short consumer discretionary and services such as airlines – has been partially offset by a home-bias flow. Investors have also been buying tech and unwinding dollar shorts.

Some of this reflects a flight to domestic markets until the conflict ends; some reflects a broader rethink of the EM-DM exposure shift. Energy intensity across refining, drilling and mining will become a bigger factor if the conflict extends beyond mid-April. Markets have yet to fully price in demand destruction risk. If it materializes, it could flip exposures sharply: stocks to bonds, rate hikes to cuts, and value back to carry.

Over the next quarter, equity investors should prioritize scenario discipline – anchored on conflict duration, tanker utilization, and insurance and shipping costs – while stress-testing assumptions around refining bottlenecks and product spreads. A sustained products-led shock, particularly in jet fuel and diesel, risks compressing margins across energy-intensive sectors, with second-order effects from higher financing costs and tighter liquidity.

Positioning should favor companies with durable pricing power, efficient energy management and flexible feedstock and refining capabilities, alongside select midstream and logistics names that stand to benefit from supply dislocation. Diversification across quality balance sheets and cash-generative names remains important, as do hedges against input-cost volatility.

Watch for policy levers – further IEA releases, pipeline rerouting – and any easing in tanker constraints as catalysts for normalization. Conversely, if crude above $80/bbl persists through the summer, expect accelerated demand destruction, rotation toward bonds and carry, and relative resilience in tech platforms tied to AI and data infrastructure. Active risk management and incremental buying on dislocations remain prudent until visibility improves.

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