Our Opinion: 2025
Oil prices remain cool as geopolitical heat rises
The Middle East has been a powder keg for decades, and the recent 12-day conflict between Israel and Iran, has captured the attention of global investors and sent shockwaves through the energy markets. However, is regional politics still the dominant influence over oil markets that it once was?
The conflict ignited on 13 June, when Israel launched airstrikes on Iranian nuclear facilities at Fordo, Natanz and Isfahan. Brent crude surged 6.69% to $74 per barrel, and West Texas Intermediate (WTI) hit a five-month high of $81, driven by fears of supply disruptions, particularly through the Strait of Hormuz.
The jump in oil prices after Israel’s unexpected strike on Iran was significant but relatively restrained, given the intense stakes of the conflict between these Middle East adversaries.
Benchmark Brent crude prices, which are often considered a gauge for geopolitical risk, rose to a peak of $81.40 on June 23, following the United States’ strike on Iranian nuclear facilities, but then dropped sharply the same day after Iran’s retaliatory strike on a U.S military base was seen as a de-escalatory move.
The following day, prices then dipped below pre-conflict levels to $67 following Donald Trump’s announcement of a ceasefire agreement between Israel and Iran.
The doomsday scenario that the energy markets were braced for, Iran blocking the Strait of Hormuz, a critical passage for nearly 20% of global oil and gas supplies, did not materialize. In reality, Middle East oil flows faced minimal disruption throughout the conflict, meaning that, for now at least, it looks like the markets were justified in remaining calm.
The modest 15% price fluctuation during the conflict indicates that oil traders and investors have significantly lowered the geopolitical risk premium for Middle East tensions. In the past, regional conflicts have triggered far sharper price reactions.
The 1973 Arab oil embargo caused oil prices to nearly quadruple. Disruption to Iranian oil output following the 1979 revolution led to a doubling of spot prices. Iraq’s 1990 invasion of Kuwait saw Brent crude prices double to $40 per barrel by mid-October. The 2003 Second Gulf War sparked a 46% price surge.
While most of these disruptions, except the oil embargo, were short-lived, markets responded dramatically. Although each conflict is distinct, making direct comparisons complex, the oil market’s reaction to major Middle East disruptions has, in percentage terms, become progressively muted in recent decades.
Several factors could account for the shift in how the Middle East risk premium is perceived.
First, markets may be acting more rationally than before, thanks to improved access to news, data, and technology. Investors can now use satellite ship tracking and aerial images of oil fields, ports and refineries to better understand supply and demand balances.
Despite the risk of supply disruption increasing, along with prices, there were significant doubts about Iran’s actual ability or willingness to disrupt maritime activity over a long period, meaning the increases were not excessive.
Another explanation for the restrained price movements could be that regional producers, acting rationally based on past conflicts, have developed alternative export routes and storage solutions to minimize the impact of disruptions in the Gulf.
Saudi Arabia, the world’s leading oil exporter, producing approximately 9 million barrels per day (bpd), which equates to about one-tenth of global demand, has developed a crude oil pipeline from its Gulf coast to the Red Sea port of Yanbu in the west, enabling it to bypass the Strait of Hormuz. The pipeline has a capacity of 5 million bpd and could probably be expanded by another 2 million bpd.
Additionally, the United Arab Emirates, another major OPEC and regional producer, with an output of around 3.3 million bpd of crude, has a 1.5 million bpd pipeline linking its onshore oilfields to the Fujairah oil terminal that is east of the Strait of Hormuz.
Saudi Arabia, the UAE, Kuwait and Iran also possess substantial storage facilities in Asia and Europe, enabling them to maintain supply to customers during short-term disruptions.
Perhaps the primary reason for the world’s reduced concern over Middle East oil supply disruptions is the declining reliance on the region’s energy resources. In recent decades, oil production has surged in regions such as the United States, Brazil, Guyana, Canada, and China.
According to the International Energy Agency, OPEC’s share of global oil supply dropped from over 50% in the 1970s to 37% in 2010 and further to 33% in 2023, largely driven by the boom in U.S. shale oil production, the world’s largest energy consumer.
The global oil market was also well-supplied entering the recent conflict, further easing fears.
Consequently, the Israel-Iran conflict underscores a weakened connection between Middle East geopolitics and energy prices, perhaps for good. While geopolitical risks may continue to escalate, energy prices are unlikely to rise in parallel.
30th June 2025
