Oil Market May Be Underestimating Risks from Iran

On Thursday, crude oil prices reached a six-month high, with Brent crude exceeding $71 per barrel and WTI nearing $66. This surge might only be the beginning of a significant upward trend, largely hinging on the evolving dynamics between the United States and Iran. The most recent negotiations regarding Iran's nuclear program kicked off positively, with both parties expressing a desire to reach an agreement. Iran's Foreign Minister indicated progress, noting that the negotiating teams had established 'guiding principles.' However, several unresolved issues remain, and while not officially specified, reports suggest the U.S. president has grown impatient, warning Iran to finalize a deal or face severe consequences. Following this, Iran issued its own alert, asserting that it would respond decisively to any military aggression, threatening that all bases and assets of hostile forces in the region would be considered legitimate targets. Moreover, Tehran emphasized that the U.S. would bear full responsibility for any unforeseen repercussions. In response to rising tensions, the U.S. has been bolstering its military presence in the Persian Gulf, while Iran has conducted military exercises in both the Strait of Hormuz and the Gulf of Oman alongside Russia. Given these circumstances, it is noteworthy that oil prices have surged, especially considering Iran's significant production capacity of over 3 million barrels per day. While the growth of non-OPEC production contributes positively to global supply, a disruption of this magnitude cannot be easily dismissed, particularly if regional conflicts escalate. The ongoing situation raises questions about traders’ optimism, with some analysts suggesting that current expectations reflect a belief that 'everything will turn out fine.' This sentiment is likely influenced by President Trump's approach, where he seeks to halt Iran's nuclear ambitions while keeping gasoline prices low for U.S. consumers—something that would be jeopardized by military conflict. Despite the prevailing notion of an oversupplied market, the recent developments suggest potential recalibrations may be necessary. Earlier in the week, the Joint Organizations Data Initiative reported a decline in global oil demand, with a drop of over 600,000 barrels daily compared to the prior month and a decrease of over 530,000 barrels from a year earlier, despite higher production levels. Inventory figures revealed a decrease of 22 million barrels, falling 111.7 million barrels below the five-year average, challenging the narrative of a glut. As Saudi Aramco’s CEO highlighted, predictions of an oil surplus may be overstated. Additionally, dwindling spare capacity—currently at 2.5%—further complicates prospects for increasing output during supply disruptions. With geopolitical tensions and limited spare capacity in view, the previously perceived glut of oil appears increasingly uncertain. While the risk of conflict should neither be overstated nor underestimated, it undeniably contributes to the volatility that defines oil trading today.