The investment fraternity has had to contend with unprecedented circumstances since the end of February. Peacetime relationships between different asset classes have been upended, and correlations have broken down. One of the most conspicuous examples is the relationship between oil prices and commercial oil inventories. Conventional wisdom holds that lower oil inventories lead to higher oil prices, simply because less oil is available in the event of an unexpected supply disruption. Yet, as the accompanying chart illustrates, this inverse relationship has completely broken down, especially since April. Depleting stocks, caused by the loss of 20 mbpd of crude oil and petroleum products that would normally travel through the Strait of Hormuz, have failed to translate into persistently high oil prices.

The reasons are numerous. First, the actual loss of oil has amounted to less than 20 mbpd because alternative routes, such as Saudi Arabia’s East-West Pipeline and the UAE pipeline running from Habshan to Fujairah, have been utilised effectively. Strategic Petroleum Reserve (SPR) releases, although smaller than the announced 400 million barrels, have also helped mitigate the shortage. Waivers allowing the sale of Russian and Iranian oil stored offshore have been another factor in alleviating the strain. So too has the scaling back of Chinese crude oil imports, together with the inevitable demand destruction triggered by the initial rally above $100/bbl.

Yet these measures, some coordinated and others improvised, have not been sufficient to fully offset the lost volume. The possibly temporary withdrawal of financial demand has also played a significant role in oil’s inability to remain decisively above $100/bbl. Uncertainty and fatigue have prompted a migration of capital from oil and other asset classes into technology stocks in search of more attractive returns as the AI craze has taken hold. This exodus has been reflected in the loss of liquidity, declining open interest and subdued trading volumes in the oil market and elsewhere.

Now that a tentative agreement has been reached to reopen the Strait, calm may finally be restored. The road to re-establishing the pre-crisis status quo will be long and likely marked by setbacks, but the significance of the ceasefire agreement should not be underestimated. It is unlikely to result in a sudden increase in U.S. or global commercial oil inventories. However, the return of predictability and certainty is likely to attract investors back to the oil market. Confidence will strengthen, and with global oil supply expected to remain in deficit throughout 2026, there is a compelling case that the weakness observed in the run-up to and immediate aftermath of the ceasefire agreement will prove short-lived. The inverse correlation between oil inventories and prices should reassert itself in the months ahead. The alternative – namely, a breakdown of the armistice and a renewed flare-up in tensions – would have the same effect on the price of a barrel of oil.