War and oil: Indo-Pakistani conflict drives prices up Geopolitics heats up the market
The downward trend in hydrocarbon prices observed since early April abruptly shifted to a bullish trajectory.
On the morning of Wednesday, May 7, global oil prices began to rise following the release of data from the American Petroleum Institute (API), which showed a decline in U.S. oil inventories. Additional momentum came from Beijing’s readiness to begin tariff consultations with Washington in the coming days. However, the surge in prices was also influenced by an airstrike carried out by the Indian Air Force and subsequent rocket attacks on Pakistani border settlements during the night of May 7. Pakistan’s energy infrastructure sustained damage. All of these developments have raised the stakes for a potential escalation of the military conflict in the region, further fuelling the upward pressure on oil prices.
Leading global commodity exchanges have been under significant pressure for about a month and a half, weighed down by the U.S. tariff war with China and other major economies, as well as a shift in the production strategy of Saudi Arabia and several other OPEC+ members now poised to significantly increase oil output.
On May 3, cartel leaders agreed to continue easing supply restrictions in a bid to influence certain overproducing signatories of the deal and reclaim lost market share. The latest production hike—over 400,000 barrels per day starting in June—nearly coincides with a similar increase announced last month, when Riyadh unexpectedly decided to triple the volume of oil initially planned for May.
The situation has been further aggravated by U.S.-initiated trade wars, which pose a threat to global demand and have already triggered a sharp decline in prices across Asian commodity exchanges. In light of these developments, traders and investors are increasingly concerned that the combination of rising supply and falling demand could lead to global oversupply.
On May 5, spot prices for Brent crude on London’s ICE exchange dropped to $58.88 per barrel, while June futures slipped to $55.30 per barrel.
It seemed the market had fallen firmly into bearish territory, with oil quotes pushed down to two-year lows. However, on May 6-7, the market came under the influence of an entirely different set of factors.
At the London-based Intercontinental Exchange Futures (ICE), Brent crude prices climbed to $63.18 per barrel, trading at this level for the first time since April 30. Meanwhile, the price of Azerbaijani crude oil, Azeri Light, rose to $64.94 per barrel on a CIF basis at the Italian port of Augusta.
Overall, oil prices have rebounded by 7.5% from the local low reached on May 5. Moreover, the oil market has recovered 20% upward after a sharp decline that began in early April.
One of the key drivers behind the current price increase, according to analysts, is the latest data from the American Petroleum Institute (API), which reported that U.S. commercial crude oil inventories fell by 4.49 million barrels for the week ending May 2. A further, albeit modest, decline in inventories is expected in the short term.
The sustained drop in oil prices since April has prompted some U.S. energy companies—most notably Diamondback Energy and Coterra Energy—to announce reductions in the number of active drilling rigs.
Analysts point out that these developments are likely to support prices over time due to the anticipated reduction in supply. It’s also important to consider that the critical price threshold for many U.S. shale oil producers is around $62 per barrel for WTI crude.
According to estimates from S&P Global, any further downward pressure driving prices to around $50 per barrel could result in a production cut exceeding 1 million barrels per day—effectively bringing the entire U.S. shale sector to a standstill.
On the other hand, recent days have seen signs of progress in resolving trade tensions between the United States and China, with both sides showing readiness to finally begin negotiations. According to Bloomberg, this development has positively influenced expectations of easing tensions between the world’s two largest economies. Moreover, there is growing optimism globally regarding the gradual reduction of “draconian” tariffs—an outlook which, according to analysts at the Dutch banking giant ING Group, is likely to boost global oil demand.
Oil prices are also responding to other encouraging signals of growing demand. In China, consumer spending surged during the Labour Day holiday, and following the five-day break, market activity has recovered. Meanwhile in Europe, companies are now expecting first-quarter profit growth of 0.4%—a notable improvement from the previous week’s forecast of a 1.7% decline.
Finally, the most significant factor behind the sharp rise in oil prices has been the escalation of the Indo-Pakistani conflict into a full-fledged military confrontation. In the early hours of May 7, India launched “Operation Sindoor,” conducting air and missile strikes on Pakistan’s border regions. The attacks targeted towns including Kotli, Bahawalpur, and Muzaffarabad—predominantly civilian areas—resulting in the deaths and injuries of around fifty Pakistani citizens.
In response, Pakistan carried out retaliatory strikes focused solely on Indian military infrastructure, targeting border outposts and command centres, and reportedly downing around five Indian fighter jets. Despite appeals from the international community and the United Nations to de-escalate tensions, India launched an additional strike against Pakistan’s Neelum–Jhelum Hydropower Plant later that night, damaging the facility according to Pakistani military sources.
Furthermore, authorities in New Delhi have threatened to cut off water supplies by closing the gates of major reservoirs—many of which control the headwaters of rivers flowing into Pakistan—effectively threatening the country’s access to freshwater.
Experts warn that these reckless steps could have dire consequences for the broader region, particularly given the proximity of vital maritime oil transit routes connecting Asian nations with the Persian Gulf. Concerns among oil traders and brokers over the escalating India–Pakistan conflict were already reflected in rising oil prices by May 7 morning.
“Market participants were responding not only to the need to reverse oversold positions but also to growing fears of a sharp deterioration in India–Pakistan relations—fears that materialised overnight,” said Alexey Antonov, Head of Investment Consulting at Alor Broker. According to Antonov, the oil price chart now shows a “double bottom” formation, indicating a shift toward an upward trend.
It is worth recalling that the escalation of military conflicts and sanctions-related standoffs has historically led to spikes in energy prices. A similar effect was observed during the Russia–Ukraine war, which triggered Europe’s energy crisis in 2022, and again following the Hamas attack on Israel in autumn 2023, which escalated into a major Middle Eastern conflict marked by mutual missile strikes and threats to oil tanker navigation in the Red Sea corridor.
At this stage, it would be premature to speculate on how long or how intense the Indo-Pakistani conflict may become. However, in a worst-case scenario, the war could have a significant impact on global oil market indicators. That said, most analysts currently lean toward the view that the average Brent crude price in 2025 will remain in the range of $63 to $67 per barrel.
According to a recent forecast by the U.S. Energy Information Administration (EIA), the average Brent crude price for the current year is expected to be $65.85 per barrel, down from the earlier estimate of $67.87.
These figures fall slightly below the $70 per barrel benchmark set in Azerbaijan’s state budget for 2025. It is therefore possible that the government may opt to trim non-essential expenditures to maintain fiscal balance. Nonetheless, Azerbaijan’s sizeable foreign exchange reserves and a still-positive current account balance should enable the country to weather this period without major losses—assuming, of course, that the EIA and other expert forecasts hold steady through the year.