In recent months, concerns regarding geopolitical risks have been a dominating headline in market reports, quarterly earnings briefings, and news articles. They have, however, been used as a polite euphemism for the unpredictable American tariff policies under the current administration. But geopolitical risk is materializing into a more traditional one, the threat of long-running conflict in the Middle East putting global oil supplies at risk.
Since Israel’s attacks on Iran’s nuclear facilities, WIT crude oil futures have increased by 14%, rising on fears of regional supply disruptions. For instance, over the first few days of the conflict, Israel hit the Sharan oil facility in Tehran, one of the largest oil storage and distribution facilities in the country, and the Farj Jam gas plant in the south, halting production of 12 mcm of gas. These attacks highlighted Israel’s approach towards, among others, targeting energy infrastructure in Iran.
Iran produces around 3.3 mn barrels of crude oil per day, of which 2mn are exported. The International Energy Agency estimates global oil demand at 104 mn bpd, considering which, Iran’s exports account for less than 2%. What’s more, Saudi Arabia reportedly is capable of quickly ramping up production by more than 3.5 mn bpd, thereby being able to accommodate any potential supply deficits on the market.
Considering this, the increase in oil prices following the initial Israeli strikes are reflective not of potential loss of exports from Iran, but rather of wider concerns that the conflict could spiral to a point where Tehran attempts to close the critical Strait of Hormuz to tankers or even attack the oil facilities of its neighbors. Although a recurrence of the events that transpired during the Tanker War of the 1980’s are unlikely, reports indicate that large-scale GPS jamming is already affecting approximately 970 ships per day. Although the strait (through which roughly 20% of global oil and gas flows) remains operational, commercial traffic, shipowners, insurers, charterers, and energy traders are now reassessing maritime safety and security. According to data from Windward, Hormuz transit has fallen by 20% over the course of a week. Additionally, 35 tankers have been identified as stationary in Omani waters, an 82% increase over expected levels.
Freight rates have nearly doubled in just three days as shipowners adjust pricing to reflect increased risk. The rates of chartering large vessels (capable of carrying 2mn barrels of oil) from the Gulf to China have increased from $20,000 per day to $47,000 per day. Owners are responding by demanding partial freight payments in advance or renegotiating charters mid-voyage. Frontline, the world’s fourth-largest oil tanker shipping company, has announced that it will no longer accept charters requiring its vessels to enter the region.
Despite the ongoing conflict in the area and the subsequent trade disruptions outlining a market environment for ever-rising oil prices, recent history teaches us that the markets are currently likely overshooting the new equilibrium commodity and risk pricing. Research published by the European Central Bank (ECB) in 2023 highlights how Brent crude prices have historically responded to geopolitical shocks. Following the 9/11 attacks in New York, prices initially rose by 5% as markets factored in the risk of Middle East conflict disrupting oil supplies. However, within 14 days, prices fell by 25% amid concerns that a slowing global economy would dampen demand. Similarly, Brent surged 30% in the two weeks after Russia invaded Ukraine in February 2022, only to return to pre-invasion levels within eight weeks.
The ECB study identifies two main channels through which geopolitical shocks affect the global economy. In the short term, the risk channel dominates: markets anticipate potential supply disruptions, increasing the so-called convenience yield, the premium for holding oil, thereby driving prices up. Over time, however, the economic activity channel takes precedence. Elevated geopolitical tension tends to suppress global demand by increasing uncertainty, discouraging investment and consumption, and potentially impairing trade. As a result, oil prices typically decline.
The ultimate impact of the current Israel-Iran conflict will depend on its duration and scale. Historical context suggests that unless there is a major disruption to oil output, the effects may be limited. Even during the Iran-Iraq “Tanker War” of the 1980s, when more than 200 oil tankers were attacked in the Strait of Hormuz, prices stabilized after an initial surge.
