Geopolitics remains wild card for oil prices

Global oil markets may be underestimating the geopolitical risks stemming from tensions between the United States and Iran, despite the cushioning effect of rising U.S. shale production, according to an analysis by Oilprice.com.

Brent crude recently climbed above $67 per barrel, while U.S. benchmark West Texas Intermediate (WTI) rose past $62, after renewed concerns over possible military escalation between Washington and Tehran. The price gains highlight how quickly geopolitical developments can still move markets, challenging the widespread assumption that U.S. shale output has permanently reduced oil’s vulnerability to Middle East instability.

For years, analysts argued that only a major disruption—such as a blockade of the Strait of Hormuz—could significantly shake global oil markets. Such a blockade is widely viewed as unlikely. However, the latest rally suggests that even the threat of conflict can trigger price volatility.

Rystad Energy has outlined five possible scenarios for U.S.-Iran relations, ranging from renewed diplomatic talks and a potential nuclear agreement to limited or extensive military strikes. A successful deal that eases sanctions on Iran would likely boost Iranian oil production and weigh on prices. More confrontational scenarios, including strikes on nuclear or energy infrastructure, could push prices higher.

Even in worst-case projections, Rystad estimates oil prices might rise by $10 to $15 per barrel if Iranian production—currently around 3.2 million barrels per day—were disrupted. Some analysts, however, warn that a broader regional conflict could send prices above $100 per barrel.

A temporary closure of the Strait of Hormuz, through which roughly 20% of global oil supply passes, could produce a sharp but potentially short-lived spike. Historical data suggest prices could jump by as much as 80% in such a scenario. Still, some economists argue that improved energy efficiency—particularly in major economies such as the United States—would limit the long-term economic fallout compared with previous decades.

At the same time, diplomatic signals from Tehran indicate a possible willingness to negotiate sanctions relief, which would be bearish for prices if realised. Yet reports of increased U.S. military deployments in the Gulf underscore that escalation risks remain.

China, the world’s largest crude importer and a key buyer of Iranian oil, has expanded storage capacity and stockpiled supplies, potentially insulating itself from short-term shocks. Many other countries, however, lack similar buffers.

By Sabina Mammadli