Fears of a US-Iran conflict disrupting oil flows are overstated. Any potential US military action would likely be designed to be 'surgical' to specifically avoid Iran's oil infrastructure, as the administration's priority is preventing economic shocks and energy price hikes ahead of elections.

The recent surge in oil prices to $78 per barrel is not just vague fear. Analyst models suggest the market has priced in an $8-13 risk premium, which corresponds directly to the expected impact of a complete, four-week closure of the Strait of Hormuz, providing a concrete measure of market sentiment.

Despite rising oil prices, there's no evidence of a supply shortage. Physical market indicators have even softened. The rally is fueled by investors buying "insurance" against potential geopolitical disruptions, creating a risk premium that doesn't reflect the market's weak underlying fundamentals.

The impact of an oil supply disruption on price is a convex function of its duration. A short-term closure results in delayed deliveries with minimal price effect, while a prolonged one exhausts storage and requires triple-digit prices to force demand destruction and rebalance the market.

If the conflict leads to persistently high oil prices and sticky inflation, bonds may fail to act as a safe-haven asset. Both stock and bond prices could fall in tandem, undermining traditional balanced portfolio strategies.

The conflict's primary impact on oil is not that supply is offline, but that its transport through the Strait of Hormuz is blocked. This distinction is key to understanding price scenarios, as supply exists but cannot be delivered.

The market is pricing a significantly larger risk premium into Brent crude oil compared to natural gas. Analysts believe potential disruptions from U.S.-Iran talks would primarily impact Iranian oil exports, rather than cause wider disruptions to LNG flows through the Strait of Hormuz, which would affect gas prices.

While global spare oil capacity exists as a buffer, it is heavily concentrated in Saudi Arabia, the UAE, and Kuwait. During a conflict, if the Strait of Hormuz is effectively closed, this capacity becomes physically trapped and cannot be deployed to global markets, nullifying its role as a price stabilizer.

Despite heightened U.S.-Iran tensions, oil prices show only a minor risk premium (~$2). The market believes an oversupplied global market, coupled with a U.S. preference for surgical strikes that avoid energy infrastructure, will prevent a major supply disruption.