Oil markets are once again being asked to price geopolitical risk in an environment where escalation feels possible, but not yet inevitable.
Tensions between Iran and the United States have intensified against a backdrop of domestic unrest inside Iran, renewed military signalling in the Gulf, and increasingly confrontational rhetoric from both sides. While headlines have been crowded out by broader global political noise, the implications for energy markets remain significant.
Iran is facing what may be the most serious internal unrest of its modern history, while the US has stepped up its military presence in the region following last year’s strikes on Iranian nuclear facilities. With American naval assets gathering in the Gulf and Iranian officials warning that any further action could trigger a regional war, the situation has moved firmly into a phase of brinkmanship. From a market perspective, the concern is not political instability per se, but the risk of disruption to oil supply, either directly through Iranian production or indirectly via regional spillovers.
Despite this backdrop, oil’s price response has so far remained relatively contained. Crude prices rose sharply earlier in the year as tensions escalated, only to retrace part of those gains amid renewed diplomatic headlines and a broader cooling in risk sentiment. This pattern suggests that markets are acknowledging the risk but not yet pricing a worst-case scenario. Part of the reason is the fact that both Iran and the US have confirmed that talks are in place and progressing, diffusing the media hype that they are on the brink of war.
The key vulnerability lies in the Strait of Hormuz. Any sustained conflict involving Iran would raise the risk of disruption to one of the world’s most critical energy chokepoints, through which roughly a fifth of global oil consumption flows. Unlike previous episodes of tension, the current environment carries additional complexity: advanced military capabilities, the risk of internal fragmentation within Iran, and the potential for miscalculation amid heightened political pressure. Even temporary disruptions could have outsized effects on prices, given already tight spare capacity and fragile global supply chains.
The central question for markets is whether current tensions remain a war of words and positioning, or whether they tip into action that materially threatens supply. It is arguable that the scale and speed of the US military buildup increase the risk of escalation, even if neither side is actively seeking full-scale conflict. For oil markets, this creates an asymmetric risk profile: limited downside from de-escalation, but significant upside if supply fears intensify.
US crude daily chart
By Daniela Hathorn, Senior Market Analyst at Capital.com
