The 20 million barrels of oil flowing daily through the Strait of Hormuz represent 20% of global supply. A blockade constitutes a disruption four times larger than the Iranian Revolution or Yom Kippur War embargoes, with no simple replacement.

After weathering COVID, the Russia-Ukraine war, and Houthi attacks, the oil market grew "overly sanguine," learning that it was flexible enough to fix most problems. This learned resilience left it unprepared for the Strait of Hormuz closure, a physical problem that market mechanisms cannot easily solve.

Sanctions on major Russian oil companies don't halt exports but instead push them into opaque channels. Russia uses independent traders and restructured ownership to create "unknown" cargos, removing sanctioned company names from documents. This model, proven with smaller firms, maintains export volumes while obscuring the oil's origin.

Russia has dramatically shifted its oil trade away from the U.S. dollar, with only 5% of exports now settled in USD, down from 55% in 2022. While this circumvents direct financial sanctions, Russia remains vulnerable as key logistics like freight and insurance are still dollar-linked, increasing costs and complexity.

The Middle East conflict has moved beyond risk to a physical blockade of the Strait of Hormuz. With commercial tankers no longer transiting, nearly 20% of global oil is cut off from markets. This supply disruption, not just a risk premium, is driving oil prices toward $100/barrel.

Despite market fears over Iran and Russian sanctions, J.P. Morgan believes no real supply disruption will occur. The White House's focus on midterm elections will prevent escalations that impact oil supply, and Russia can easily sell its crude at a discount, leading to a surplus.

Indian refiners are likely to reduce direct purchases from sanctioned Russian entities like Rosneft. This is driven less by the sanctions themselves and more by the desire to protect their reputation and maintain access to the global financial system. The precedent set with Iran, where official imports dropped to zero, suggests a similar pattern.

The primary impact of U.S. sanctions on Russian oil is not a reduction in supply but a compression of profit margins. Russia is forced to offer deeper discounts, estimated at $3-$5 per barrel below pre-sanction levels, to compensate buyers for increased logistical and financial risks, ensuring export flows remain stable.

As Russia redirects crude, China has become a key buyer, increasing imports so much that they now exceed an informal 20% cap on any single supplier's share. This signals a strategic energy policy shift and highlights China's role as a willing buyer for sanctioned Russian barrels.