Oil Market Focuses on US-Iran Tensions: How Does This Confrontation Between Arch-Rivals Differ?

Driven by fears that the Middle East geopolitical situation could deteriorate significantly, international oil prices closed at their highest level in over three months on Wednesday. During overnight trading, the US benchmark WTI crude experienced a sharp intraday drop due to signs of easing tensions between the US and Iran, yet the potential threat of American military intervention continues to unsettle Wall Street. Given that any spark of conflict between the US and Iran could rapidly spread across this oil-rich region, this week's price surge serves as a stark warning—the potential upside for oil prices should not be underestimated. "History teaches us that turmoil in the Persian Gulf region is never just a local affair for the oil market," said Nigel Green, CEO of financial consultancy deVere Group. Iran alone poses a clear risk to global oil production, while also playing a critical role in ensuring the smooth flow of crude through shipping lanes in a region that contributes approximately 30% of the world's oil supply. Tensions between the US and Iran have escalated multiple times before, particularly during the 1979 Iranian Revolution, so market anxiety over renewed hostilities is familiar; however, the current situation feels distinctly different. Reports of anti-government protests in Tehran resulting in thousands of deaths prompted a warning from US President Trump about potential military intervention. The US also began evacuating military personnel from Qatar, a precautionary move hinting at broader regional action. However, later on Wednesday, Trump appeared to soften his rhetoric regarding potential actions, stating that Iran had indicated it would cease cracking down on protesters. According to data from the US Energy Information Administration (EIA), Iran holds the world's third-largest proven crude oil reserves and was the ninth-largest oil producer globally in 2023, with an average daily output of around 4 million barrels. Consequently, Rich Tabaka, President of independent oil and gas firm Allied Resource Partners, noted that in the event of a conflict, the impact of supply disruptions "could escalate from being manageable to a systemic crisis." The initial shock—a sharp decline in Iranian oil exports—could trigger more severe secondary effects, including "rising war risk insurance premiums, a reduction in available tankers, route adjustments and shipping delays, and increased freight costs." He emphasized, "These frictional factors could reduce effective supply volumes by a much greater margin than the superficial drop in crude production numbers." Keep a close watch on tanker movements. Tabaka stated that while OPEC's major producers have "spare" capacity on paper, "most of this spare capacity is concentrated in the same region." Spare capacity refers to the additional oil production that producers can bring online quickly to meet market demand. He added that this means "if regional logistics and shipping channels are obstructed, this spare capacity cannot be brought to market rapidly. When the bottleneck is in transportation rather than production, spare capacity fails to provide a reliable safety net." Data from the International Energy Agency (IEA) indicates that Middle Eastern crude production accounted for roughly 31% of global output in 2023. The Strait of Hormuz is a critical global oil chokepoint, and the risk of Iran disrupting oil shipments through the Strait has long been a core market concern. "Conflicts involving Iran are rarely contained; they heighten risks to shipping routes, oil production in the Gulf, and energy infrastructure," Green said. This factor has driven international oil prices steadily higher recently. According to Dow Jones Market Data, WTI crude futures on the New York Mercantile Exchange settled at $62.02 a barrel on Wednesday, the highest close since October 8 of last year. The global benchmark Brent crude futures on the Intercontinental Exchange settled at $66.52 a barrel, the highest level since September 30 of last year. Amid an oversupply backdrop, disruptions from major producers may trigger short-term volatility. The oil market has been on edge due to uncertainties surrounding two key global producers, Iran and Venezuela. Following the US military action that seized control of Venezuelan strongman Maduro earlier this month, US crude prices have climbed approximately 8% year-to-date in 2026. "Iran's impact on the oil market stems more from market panic than from actual crude production," said Jay Young, Founder and CEO of oil and gas operator King Operating. "Oil price movements often precede fundamental changes—when tensions rise in the Middle East, the market adds a risk premium to prices even before any supply disruption occurs." So far, there has been no disruption to Iranian oil supplies, and supply issues are less acute than in the past. Young pointed out, "The key difference in this situation compared to past crises is that the US is now the world's largest oil producer. This provides the market with a much larger buffer than it had decades ago." This also suggests that, against the backdrop of a global crude oversupply at the start of 2026, the impact of geopolitics on oil prices might be relatively moderate. "Geopolitical shocks today often cause price volatility rather than long-term supply shortages," Young told MarketWatch. The Iranian regime is now a market focal point. Another crucial difference in the renewed US-Iran tensions appears to be the stability of the Iranian regime's foundation. Pavel Molchanov, Investment Strategy Analyst at Raymond James, stated that the 1979 Iranian Revolution, which transformed the state from the pro-Western Pahlavi dynasty to an anti-Western Islamic Republic, significantly increased the oil market's risk premium. Risk premium refers to the extra cost investors are willing to pay for oil futures to hedge against price volatility. Molchanov suggested that if the current crisis ultimately leads to a fundamental political shift towards democracy in Iran, the impact would be the opposite of the 1979 revolution—theoretically, the re-establishment of a pro-Western government in Tehran would lower oil prices in the long run. Currently, foreign investment accounts for only 0.3% of Iran's GDP, the lowest level in two decades. Molchanov noted that if a new Iranian government could attract back foreign investment and international sanctions were eventually lifted, the country's oil production could gradually increase. "A revolutionary upheaval in Iran seems only a matter of time," Christopher Granville, Managing Director of TS Lombard, said in a report released Wednesday. He stated that in the current oversupplied global crude market, even an event akin to the 1979 revolution would be less threatening; at least in the short term, the current oil market volatility "more closely resembles routine, sentiment-driven blips." However, Granville also noted that, looking beyond short-term trading, "the structural risk that Iran will eventually become unstable might provide a floor for oil prices."