Middle East tensions drive oil price volatility

[WORLD] Oil prices edged higher in early Asian trading on Monday as persistent tensions in the Middle East reignited concerns over potential supply disruptions, even as global demand growth shows signs of slowing. The latest uptick follows a period of heightened volatility, with traders closely monitoring geopolitical developments and macroeconomic signals that continue to shape the energy landscape.

Key Developments: Israel-Iran Tensions and Supply Risks

The most immediate catalyst for the latest price movement is the ongoing conflict in the Middle East. Over the weekend, the Israeli military announced plans to seize 75% of the Gaza Strip within two months, raising fears of a broader regional escalation. Analysts at ANZ Research warn that an expanded conflict could threaten oil supplies from other Middle Eastern producers, especially if Iran or its allied groups, such as the Houthis, make good on threats to disrupt oil deliveries in the region.

Recent intelligence reports suggest Israel may be preparing strikes on Iranian nuclear facilities, a move that could provoke a direct Iranian response. Such a scenario risks disrupting the flow of oil through the Strait of Hormuz, a critical chokepoint for global crude exports from Saudi Arabia, Kuwait, Iraq, and the United Arab Emirates. Iran’s oil exports, currently around 1.5 million barrels per day, could be particularly vulnerable to military action or retaliatory blockades.

Market Reaction: Prices Respond to Uncertainty

Front-month West Texas Intermediate (WTI) crude futures rose 0.8% to $62.00 per barrel, while Brent crude futures climbed 0.7% to $65.25 per barrel in early trading. These gains come after a week of pronounced volatility, with prices surging over 1% on news of potential Israeli strikes and then retreating as U.S. crude inventories unexpectedly swelled, signaling weaker domestic demand.

Implied volatility—a measure of expected price swings—has averaged over 35% since April, reflecting the market’s heightened sensitivity to both geopolitical and economic developments. While fears of immediate supply disruption have provided some price support, analysts caution that the fundamental backdrop remains fragile.

Supply-Demand Dynamics: Surplus Looms Despite Risks

Despite the geopolitical premium, the broader outlook for oil prices remains clouded by concerns over oversupply and tepid demand growth. The International Energy Agency (IEA) projects global oil inventories will increase by an average of 0.4 million barrels per day in 2025, accelerating to 0.8 million barrels per day in 2026 as non-OPEC producers ramp up output. OPEC+ has announced plans to gradually unwind voluntary production cuts, with additional capacity coming online in the United Arab Emirates, Kazakhstan, and Iraq.

Meanwhile, global oil demand growth has been revised downward, with the IEA now expecting an increase of just 730,000 barrels per day in 2025—a significant slowdown compared to previous years. Economic uncertainty, particularly stemming from ongoing trade tensions and sluggish growth in China, continues to weigh on consumption forecasts.

The Role of U.S. Policy and OPEC+

U.S. energy policy remains a wildcard. President Trump’s administration has prioritized lower oil prices to combat inflation, signaling a reluctance to intervene unless prices fall below $50 per barrel—where U.S. shale production becomes unprofitable. OPEC+, for its part, faces the challenge of balancing market share with price stability. While the group has demonstrated strong compliance with output quotas, the risk of overproduction looms as members seek to maximize revenues in a competitive environment.

Outlook: Volatility Likely to Persist

Analysts are divided on the trajectory for oil prices in the coming months. Goldman Sachs Research forecasts Brent crude will trade between $70 and $85 per barrel, assuming no major supply disruption, but warns that a significant and sustained outage in the Persian Gulf could push prices above $100 per barrel—potentially triggering a global recession. J.P. Morgan Research, meanwhile, maintains a more bearish outlook, projecting Brent at $66 per barrel for 2025 amid expectations of surplus supply and subdued demand.

“We are likely entering a cycle of exchanges between Israel and Iran, with potential attacks,” said Bob McNally, former energy adviser and president of Rapid Energy Group. “A substantial and lasting disruption of energy supplies from the Persian Gulf could push oil prices above $100 per barrel, potentially triggering a global recession.”

Implications for Consumers and the Global Economy

For consumers, the recent rise in oil prices has translated into higher gasoline costs, though the increases have been modest compared to previous crises. The average price for a gallon of gas in the U.S. rose by five cents last week, reflecting the market’s sensitivity to geopolitical developments. However, if tensions escalate and supply is materially disrupted, more pronounced price spikes could follow.

Lower oil prices, should they materialize later in the year, could offer relief to consumers and help offset inflationary pressures—especially as households grapple with higher costs from import tariffs and other economic headwinds.

Oil markets remain at the crossroads of geopolitical risk and economic uncertainty. While the threat of Middle East conflict has injected a risk premium into prices, underlying fundamentals point to a well-supplied market with limited demand growth. As negotiations and military posturing continue, traders and policymakers alike will be watching closely for signs of escalation—or resolution—that could set the tone for global energy markets in the months ahead.