Oil bears are underestimating geopolitical risk at their peril. For decades, crude prices swung on even the faintest hint of Middle East conflict. The rise of U.S. shale changed that dynamic, fueling a belief that anything short of a full oil blockade in the Strait of Hormuz would barely move markets—and that such a blockade was unlikely anyway. But that confidence is misplaced. Geopolitics can still rewrite the script for oil bears.
The latest price surge was sparked by the threat of a military showdown between the United States and Iran. Notably, the earlier U.S. oil blockade on Venezuela this year did not produce a sustained move in benchmarks. By contrast, a war with Iran has driven Brent above $67 per barrel and WTI above $62, highlighting how quickly tensions can lift prices.
Rystad Energy laid out five possible trajectories for U.S.–Iranian relations. The most favorable path involves productive talks that yield a new nuclear framework, effectively pressuring Tehran to ramp up its oil output. While that scenario is bearish for oil in the near term, the other four paths grow progressively more bullish. They range from limited U.S. strikes on Iranian nuclear or oil facilities to broad conflict, potentially including the death of Iran’s Supreme Leader and resulting civil turmoil following a government collapse.
Interestingly, Rystad Energy does not anticipate dramatic price surges in any scenario. In the worst cases, oil could rise by $10–$15 per barrel as Iranian production suffers in the aftermath of destabilizing events. Some observers warn that if conflict spills beyond Iran, prices could exceed $100 a barrel.
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A recent Bloomberg piece explored a more extreme scenario: if Iran closed the Strait of Hormuz—even briefly—the impact could be severe, disrupting about 20% of global oil supply and potentially pushing prices up by as much as 80% based on historical patterns. Yet the authors noted that today’s price shocks may not translate into equally large economic pain, thanks to a smaller proportion of oil in global GDP and inflation, which means higher prices buy fewer goods than in the past. Dina Esfandiary and Ziad Daoud emphasize that while a $100 oil environment is uncomfortable, it’s not as devastating as it would have been decades ago.
Even so, a major disruption remains an unlikely core scenario for a U.S.–Iran confrontation. Reuters reported that Iran has signaled willingness to negotiate and potentially concede to secure sanctions relief, a development that would be bearish for oil if it expands Iran’s production. If negotiations fail, escalation remains on the table, and the prospect of a protracted standoff persists, particularly as the United States has been signaling a stronger military presence in the Persian Gulf. An extended conflict heightens the risk of targeted oil infrastructure and wider regional spillovers to other Middle Eastern producers.
Past events suggest that regional players don’t want a sudden, uncontrollable spike in oil prices. Demand sensitivity to price shocks exists—though it’s less elastic than in the past. Some analysts point to China’s strategic stockpiling and its heavy Iranian imports as a hedge against price spikes, implying China can cushion shocks more than many other economies. However, the global economy remains less insulated, and a geopolitical price shock would still be painful worldwide.
– Irina Slav for OilPrice.com
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