Oil markets have lurched from complacency to panic in a matter of days. Brent crude has surged past $100, climbing roughly 50% since hostilities escalated around the Strait of Hormuz — the world's most critical oil shipping chokepoint.

But one economist believes the market's reaction may now be overshooting reality.

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Robin Brooks, senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, argues that although markets initially were slow to price the disruption, sentiment may now be running ahead of fundamentals.

"Markets were slow to price the enormity of what was happening a week ago," Brooks wrote. But with Brent now up about 50% since the conflict began, he says traders may be pricing in a worst-case scenario.

Panic Pricing Versus Reality

Brooks compared the current surge to the spike following the Russian invasion of Ukraine in 2022. On a similar timeline, Brent has climbed far more sharply this time — suggesting markets may have swung from complacency to outright panic.

That shift has ripple effects across markets. Energy funds like the Energy Select Sector SPDR Fund (NYSE:XLE) and the State Street SPDR S&P Oil & Gas Exploration & Production ETF (NYSE:XOP) and oil trackers such as the United States Oil Fund (NYSE:USO) have surged alongside crude. These funds draw attention when investors start bracing for economic stress tied to higher energy costs.

Three Catalysts That Could Push Oil Lower

Brooks outlines three developments that could quickly unwind the current surge.

  • First, the closure of the Strait of Hormuz may already be fully priced in. "The Strait can't get any more closed than it already is," he noted.
  • Second, even a small restart of tanker traffic could change market psychology. "Even just a few" ships resuming transit could reduce the massive risk premium now embedded in oil prices.
  • Third, political instability inside Iran could reshape the geopolitical landscape.

For now, Brooks argues the oil market is being driven as much by psychology as by supply fundamentals — meaning the current spike could reverse quickly if sentiment shifts.