Oil surges to six-month high as US-Iran tensions threaten supply shock

Crude markets are stirring again — and this time geopolitics may be the decisive force.

On February 19, oil prices settled at their highest level in six months, with Brent crude climbing above $71 per barrel and WTI surpassing $66. While the gains are notable, the bigger story may be what comes next. As an analysis by Oilprice.com highlights, the trajectory of prices now hinges heavily on the increasingly fragile relationship between the United States and Iran.

The latest round of negotiations over Iran’s nuclear programme initially appeared constructive. Both sides signaled a willingness to reach an agreement, and Iran’s Foreign Minister said progress had been made, noting that negotiators had agreed on “guiding principles.” Yet unresolved sticking points remain undisclosed, and diplomatic momentum appears to have faltered. President Donald Trump reportedly issued a blunt warning: make a deal or “Otherwise bad things happen.”

Tehran responded with equally stark language. In a letter to the United Nations, Iran warned that “in the event that it is subjected to military aggression, Iran will respond decisively and proportionately.” It added: “All bases, facilities, and assets of the hostile force in the region would constitute legitimate targets. The United States would bear full and direct responsibility for any unpredictable and uncontrolled consequences.”

The rhetoric has been accompanied by military posturing. The United States has expanded its already substantial presence in the Persian Gulf, while Iran has conducted drills in the Strait of Hormuz and the Gulf of Oman, including joint exercises with Russia. Despite this escalation, oil markets have not yet priced in a worst-case scenario.

That restraint is striking. Iran produces more than 3 million barrels per day, a significant share of global supply. For much of the past year, the dominant narrative has been one of oversupply. Even amid sanctions on Russia and periodic Middle East flare-ups, traders assumed global production growth — especially from non-OPEC producers — would cushion disruptions.

However, fresh data complicates the “glut” thesis. According to the Joint Organizations Data Initiative, global oil demand in December 2025 fell by over 600,000 barrels per day from the previous month and by more than 530,000 barrels compared to a year earlier. Production rose both within and outside OPEC. Yet inventories declined by 22 million barrels and stood 111.7 million barrels below the five-year average — hardly indicative of abundant supply.

Saudi Aramco CEO Amin Nasser underscored the point at the World Economic Forum in Davos.

“Oil glut predictions are seriously exaggerated,” he said. He also warned that spare capacity has narrowed significantly. “It [spare capacity] is ‌at 2.5%, and we need a minimum of 3%. If OPEC+ further unwinds cuts, spare capacity will ‌fall even further, and we will need to watch this very carefully.”

In other words, the buffer against a supply shock is thinner than many assume. Sanctioned barrels in floating storage offer limited reassurance, and spare capacity is shrinking.

Still, escalation is not inevitable. As Reuters columnist Clyde Russell observed, traders appear to believe that “everything will turn out fine.” There are political incentives for restraint: Trump has emphasised affordable gasoline for U.S. consumers and cultivated an image as a dealmaker.

Yet the margin for error is narrowing. If diplomacy fails and tensions spill into open conflict, even a partial disruption of Iranian output — or broader regional instability — could quickly invalidate assumptions of oversupply.

By Sabina Mammadli