Oil futures: Hormuz, Iran, and the rising geopolitical risk premium

Global oil markets are once again moving with volatility, with geopolitical tensions in the Middle East now potentially threatening the stability of global energy supply chains.

The Strait of Hormuz, a narrow maritime chokepoint through which roughly 21% of the world's oil flows, has become the focal point of a rapidly escalating standoff between Iran and the United States, with Israel increasingly involved.

Recent developments have seen Iran launch live-fire naval drills in the Strait, US aircraft carrier strike groups moving into the region, and diplomatic negotiations in Geneva yielding what US sources have reportedly privately described as a ‘nothingburger,’ even as both sides offered cautious public statements about progress.

According to multiple reports citing unnamed officials, the US military is now ready to strike Iran as early as this weekend, pending a final decision from President Trump. For context, Iran has been given until the end of February to offer meaningful concessions on its nuclear program.

Oil prices have surged above $70 per barrel, breaching that level for the first time since July 2025, as traders price in a renewed geopolitical risk premium.

Strait of Hormuz: World's most critical oil chokepoint

The Strait of Hormuz is one of the most strategically important maritime corridors in the world. At its narrowest point, it’s only 24 miles wide, yet it handles approximately 21 million barrels of oil per day, representing about one-fifth of global consumption.

It remains the primary export route for crude oil and liquefied natural gas from Gulf producers including Saudi Arabia, the United Arab Emirates, Kuwait, Qatar and Iraq.

Any disruption to Hormuz shipping has immediate and significant consequences for oil prices. Even the perception of risk can trigger spikes in futures markets, as traders and refiners hedge against potential supply shortages.

Iran has long used the threat of closing the Strait as a geopolitical lever. During the ‘tanker war’ of the 1980s, Iran and Iraq attacked oil shipping, mined international waters and targeted vessels with missiles and speedboats. Although Iran has never fully closed the Strait, it has repeatedly demonstrated its ability to disrupt shipping, raising insurance costs and creating volatility in oil markets.

This week, Iran's Islamic Revolutionary Guard Corps launched maritime drills in the Strait of Hormuz in direct response to the US military buildup, the most significant such action since the 1980s, signalling a meaningful escalation in maritime brinkmanship.

Escalating military tensions

The current escalation is characterised by an unprecedented military buildup in the region. The USS Abraham Lincoln carrier group, equipped with guided missile destroyers and dozens of fighter jets, is already operating near Iranian waters, a location confirmed by BBC Verify using satellite imagery.

A second carrier group, the USS Gerald R Ford, which us currently the world's largest warship, is en route and expected to arrive by mid-March. As of Wednesday, the Ford was still off the coast of west Africa.

Alongside the carriers, dozens of refuelling tankers and more than 50 additional fighter jets, including F-35s, F-22s and F-16s, have been deployed to the region. More than 150 US military cargo flights have delivered weapons systems and ammunition in recent days. Significantly, the Pentagon has also begun moving some personnel out of the Middle East to reduce exposure to potential Iranian counterattacks, an operational signal that strike planning may have moved beyond the theoretical.

According to Axios reporter Barak Ravid, Trump recently met with his two envoys leading indirect talks with Iran, Steve Witkoff and Jared Kushner. Ravid's Pentagon sources told Israeli television that preparations are underway for a joint US-Israeli offensive that could last weeks, and that Iran has until the end of February to offer real concessions on its nuclear program. Israel is separately preparing for the possibility of joining US strikes.

Unlike previous limited strikes or proxy conflicts, sources suggest any conflict could be a ‘full-fledged’ multi-week war with broader objectives. This would represent a major escalation with profound implications for the energy markets.

Diplomatic efforts: A ‘nothingburger’?

Despite the military buildup, diplomatic efforts continue, though the gap between public statements and private assessments appears to have widened sharply. Talks in Geneva on Tuesday between Iranian and US representatives produced agreement on ‘guiding principles,’ and Iran's foreign minister Abbas Araghchi described the discussions as constructive.

Oman's foreign minister, who mediated the talks, said they concluded with ‘good progress.’

Behind the scenes, the picture may well be darker. US sources told Axios that the Geneva talks were a ‘nothingburger,’ and White House press secretary Karoline Leavitt acknowledged on Wednesday that the two sides remain ‘very far apart on some issues.’ She declined to specify a deadline for military action, but stated plainly that there were ‘many reasons and arguments that one could make for a strike against Iran,’ adding that ‘Iran would be very wise to make a deal with President Trump.’

Iran is expected to return with a written proposal within two weeks. Washington's red lines include limits on Iran's nuclear enrichment capabilities and, reportedly, its missile development program, the latter something Tehran has resisted including in any framework.

Iran's supreme leader Ayatollah Ali Khamenei has adopted an increasingly confrontational tone, posting an AI-generated image of the USS Gerald Ford sunk at the bottom of the ocean on social media, alongside a caption warning that Iran possesses weapons capable of sending US warships to the seabed. He has also accused the US of attempting to predetermine the outcome of negotiations.

Adding a further geopolitical dimension, Russian foreign minister Sergey Lavrov warned on Wednesday that any new US strike on Iran would have consequences that are ‘not good,’ calling the situation ‘playing with fire’ and urging Washington to allow Iran to pursue a peaceful nuclear program.

Pricing the geopolitical risk premium

Oil futures markets respond quickly to geopolitical risk, particularly when supply routes are threatened. The surge above $70 per barrel may reflect traders pricing in the possibility of supply disruptions, increased shipping costs and broader regional instability.

The $70 threshold is also psychologically significant; round numbers tend to attract additional momentum buying and media attention, which can itself become a market-moving factor.

The geopolitical risk premium is a key component of oil prices, often rising during conflicts, sanctions or threats to infrastructure. In the current scenario, multiple factors contribute to this premium.

First, any closure or military action in Hormuz could disrupt up to 21 million barrels per day, far exceeding spare production capacity elsewhere. Second, a US-Iran conflict could target oil infrastructure, refineries, pipelines and export terminals across the region.

Third, negotiations could lead to sanctions relief, increasing Iranian exports, or further sanctions tightening, reducing supply. Fourth, even without physical disruption, heightened risk increases tanker insurance premiums and freight rates, raising delivered oil prices for consumers worldwide.

These factors create volatility in futures curves, with backwardation or contango shifting depending on perceived supply risks and demand expectations.

Positive scenarios for oil markets

One positive scenario could be a diplomatic breakthrough leading to a comprehensive nuclear agreement and partial sanctions relief. This would allow Iran to increase oil exports, adding supply to the global market and potentially lowering prices.

Iran holds some of the world's largest proven oil reserves and has the capacity to increase production meaningfully if sanctions are lifted. For oil futures, this scenario would reduce the geopolitical risk premium, flatten volatility and push prices toward lower ranges.

Another positive outcome might be a continuation of military posturing without direct conflict. Historical precedent shows that many Middle East crises result in heightened rhetoric and limited skirmishes but no full-scale war. In this scenario, shipping through Hormuz continues with minimal disruption, and oil prices stabilise after an initial spike.

Traders would gradually unwind risk premiums as tensions cool, and futures markets would refocus on fundamentals such as OPEC+ production policy, US shale output and global demand growth.

Global energy markets have also become more resilient since previous crises. Strategic petroleum reserves in the US, China, and OECD countries are continually providing a buffer against short-term supply disruptions, and increased diversification of supply routes reduces systemic risk.

These structural improvements could mitigate the impact of any temporary disruptions, limiting extreme price spikes.

Negative scenarios for oil futures

The most severe potential scenario would be a full-scale conflict involving the US, Iran and Israel. Multiple reports now suggest such a conflict could begin as early as this weekend, with joint operations broader in scope than the strikes carried out in June 2025.

Such a war could target Iranian nuclear facilities, military infrastructure and potentially oil export facilities across the region. Iran could retaliate by attacking tankers, mining the Strait or striking regional oil infrastructure in Saudi Arabia, the UAE or Iraq. Oil futures could spike sharply, with some analysts suggesting prices could reach $100 per barrel or higher in extreme scenarios.

Even short of full-scale war, Iran has the capability to close or severely disrupt the Strait of Hormuz through drone attacks, missile strikes or the deployment of mines. A prolonged disruption would strain global supply chains, trigger emergency releases from strategic reserves and push futures markets into backwardation as near-term supply becomes scarce.

Even without direct US-Iran conflict, proxy attacks by Iranian-backed groups on oil infrastructure in the region could create intermittent supply shocks, keeping volatility elevated and sustaining a geopolitical risk premium in futures markets for an extended period.

Inflation, growth and market implications

Unsurprisingly, oil prices have broad macroeconomic implications. Higher oil prices feed into inflation through energy costs, transportation and manufacturing inputs, leaving central banks facing difficult trade-offs between controlling inflation and economic growth.

For energy-importing countries, sustained high oil prices can also worsen trade balances, weaken currencies and slow growth. Conversely, oil-exporting nations may benefit from increased revenues, improving fiscal balances and geopolitical leverage.

Financial markets are also sensitive to oil price shocks. Equity markets often react negatively to sudden oil price spikes due to the associated inflationary pressures and reduced consumer spending. Bond markets may price in higher inflation expectations, affecting yields and monetary policy.

For investors, the volatility of the current environment presents both opportunities and risks. Specifically, oil futures volatility creates opportunities for hedging and speculation, but also increases the risk of large losses.

In terms of equities, airlines, shipping companies and industrial consumers may increase hedging to lock in prices, but can still be negatively affected. Exposure to energy equities, commodities and alternative assets might help to hedge against the increasing geopolitical risk.

Investors could consider monitoring tanker traffic through Hormuz, satellite imagery of military deployments, the timing of Iran's written proposal to Washington and any signals from the White House regarding a final strike decision.

The Strait of Hormuz remains the world's most critical energy chokepoint, and the convergence of military readiness, stalled diplomacy and an end-of-February deadline for Iran has injected a significant and growing geopolitical risk premium into oil futures.

The gap between cautious public statements from both sides and the perhaps more worrying private assessments circulating in Washington suggests markets may not yet be fully pricing in the probability of conflict.

Positive outcomes, such as a genuine diplomatic breakthrough or a return to managed de-escalation, remain very possible and would likely unwind much of the current risk premium. But the negative scenarios, including full-scale war or disruption of Hormuz, represent tail risks with potentially severe consequences for global energy supply and the world economy.

For now, oil futures markets are balancing these competing narratives against a ticking clock.

Hormuz summed up

• The US military is ready to strike Iran as early as this weekend pending a presidential decision, with Iran given until end of February to offer nuclear concessions
• Around 21% of global oil supply passes through the Strait, making any disruption uniquely destabilising for markets and inflation globally
• While both sides offered measured statements after Geneva talks, US sources have reportedly privately called the negotiations a ‘nothingburger’
• Brent has breached $70 for the first time since July 2025, and in a conflict scenario some analysts point to $100 per barrel or beyond, creating a highly skewed risk profile