Why Are Oil Prices So Low?

Key Takeaways

• Brent trades at $111 despite >90% odds Hormuz stays closed
• Regression model explains only 15% of price variance
• GPR_Action index adds minimal explanatory power to Brent
• Trump’s warning had negligible impact on market odds

Pulse Analysis

The Strait of Hormuz has long been a barometer for oil price volatility; any disruption to its flow typically injects a risk premium into Brent and WTI markets. In the current cycle, however, the odds of the strait remaining shut through July have plummeted to historic lows, yet Brent hovers around $111—a level more reminiscent of a surplus environment than a supply‑tight scenario. This disconnect forces analysts to look beyond simple supply‑demand mechanics and consider how market participants price geopolitical uncertainty.

A recent econometric exercise combines the binary "CLOSED" variable—representing the probability of Hormuz staying shut—with the Caldara Geopolitical Risk‑Action (GPR_Action) index, a proxy for the intensity of military maneuvers. The resulting equation, Brent = 4.76 + 0.217 *CLOSED* + 0.0003 *GPR_Action*, yields an adjusted R² of just 0.15, indicating that 85% of price movements remain unexplained by these factors. The model underestimates the July price by roughly $10, suggesting that traders are discounting the geopolitical risk premium, perhaps due to confidence in alternative supply routes or expectations of a swift diplomatic resolution.

For investors and energy firms, the muted response to both the odds and President Trump’s aggressive rhetoric signals a market that is increasingly driven by macro‑economic data—global demand forecasts, inventory builds, and monetary policy—rather than isolated geopolitical flashpoints. As the summer progresses, any sudden escalation in the GPR_Action index or a credible shift in Hormuz closure probabilities could quickly re‑price risk, offering both downside threats to producers and upside opportunities for speculators. Monitoring real‑time odds platforms like Kalshi, alongside traditional EIA inventories, will be essential for navigating this nuanced risk landscape.