Oil market shifts as Iran unrest drives price gains

Brent crude futures have strengthened sharply this week as traders responded to escalating instability in Iran and broader geopolitical risks that are reshaping oil markets. Supply concerns linked to nationwide protests in one of the Organisation of the Petroleum Exporting Countries’ most significant producers have driven prices above $63 a barrel, while investors assess how unrest and geopolitical flashpoints could affect output and shipping through vital corridors. This shift comes amid ongoing volatility following aggressive moves by the United States against Venezuela’s oil sector that have added complexity to global supply dynamics.

Oil benchmarks rallied this week, with Brent up around 4 per cent and West Texas Intermediate also posting sizeable gains, reflecting market anxiety over possible supply disruptions. The unrest in Iran, where protests over economic hardship and political grievances have spread across major cities, has heightened fears that production or export flows could be interrupted, particularly given the nation’s production of more than 3 million barrels per day. The impact of these tensions is compounded by concerns about the war in Ukraine and heightened tensions involving Russian energy infrastructure, layering additional risk premiums into crude pricing and trading strategies.

Market participants pointed to Iran’s internal disruptions, including reported nationwide internet outages as authorities attempt to control dissent, as a key factor in risk assessment. Analysts note that such disruptions not only signal domestic instability but also have the potential to constrain output or complicate operations in key oil fields. Options markets have shown elevated premiums for bullish bets on crude, signalling that traders are factoring in a broader range of possible supply shocks than seen in previous months, particularly after exchanges of military strikes between Iran and Israel last summer that briefly unsettled shipping through the Strait of Hormuz.

Alongside geopolitical drivers, oil markets have been adjusting to changes in Venezuelan supply following a dramatic shift in that country’s political landscape. The capture of President Nicolás Maduro by US forces and subsequent moves by Washington to take control of Venezuela’s oil sales have drawn attention from major trading houses and energy firms. Companies are vying for contracts to market millions of barrels of Venezuelan crude that have been held in storage, although the prospect of rapid supply increases remains uncertain given infrastructure challenges and the scale of investment needed to restore production to previous levels.

China’s refiners are also adapting to these shifts, with many expected to replace lost Venezuelan barrels with heavier grade crude from Iran and Russia. Iranian crude is reportedly trading at a discount to Brent, making it an economically attractive alternative for Asian refiners, even as broader supply risk concerns persist. This reallocation of supply sources underscores how geopolitical developments are influencing not just price direction but physical oil flows and refining economics on a global scale.

The interplay between potential supply constraints and strong inventories continues to be a balancing factor. Despite price gains, global crude stocks remain ample, and oversupply concerns could limit how far and how quickly prices can rise unless the geopolitical drivers intensify. Analysts caution that unless tensions in Iran escalate into disruptions at oil facilities or major shipping routes, gains may prove modest and volatile, particularly as market sentiment swings between risk-off and risk-on postures.

Traders have been responding not only to fundamentals but also to broader macroeconomic indicators. With global markets reassessing inflation pressures and growth prospects, commodities such as oil are increasingly seen through the lens of geopolitical risk alongside traditional supply-demand metrics. Energy stocks and commodities have attracted flows as investors hedge against uncertainty, while growth-sensitive assets show more mixed performance as markets price in potential inflationary effects from higher energy costs.

The strategic importance of the Middle East’s energy exports remains clear, with potential closures or disruptions to key maritime chokepoints such as the Strait of Hormuz still a theoretical risk despite current conditions. Historical episodes of threatened closures have previously caused sharp price jumps, reminding markets of the region’s outsized influence on global energy security.