Geopolitical shock propels oil markets higher: where to next for the oil price?

​​​Geopolitical shock propels oil markets higher

​Global oil markets have been shaken by Sunday’s US bombardment of nuclear sites in Iran amid ongoing hostilities between Israel and Iran, sparking fears of a prolonged and destabilising conflict in the Middle East. This escalation has heightened regional anxiety and reignited concerns over global energy security.

​Unlike previous proxy-based tensions, this confrontation directly involves two of the most militarily capable nations in the region, similar to events in 2024. With the US’ involvement, the strategic stakes are significantly elevated, however.

​Of particular concern is the Strait of Hormuz, a critical maritime chokepoint through which nearly 20% of the world’s daily oil supply transits. Any threat to this artery by Iran poses serious global implications.

​The market reaction was swift. The oil price surged by more than 13% following the initial Israeli strikes on Iran in mid-June, reaching price levels not seen since early 2025. This sharp increase reflects both real concerns over supply and a risk premium added by markets during times of geopolitical instability.

​Reaction to US involvement in Middle East conflict short lived

​Sunday’s escalation due to the US’s involvement briefly led to a 5% spike in the oil price but by Monday morning European time the oil price traded only slightly above Friday’s level, less than one percent higher.

​Brent crude oil daily candlestick chart 

​According to Andreas Steno Larsen from Stenos Signals, there are several reasons why the flare up in the oil price has been short-lived.

​First of all, the United States made it clear from the outset that its recent strike on Iran was intended as a single, limited action. Some reports even suggest that Tehran was quietly warned in advance, giving Iran’s leadership a chance to respond without appearing weak. This move offers both Washington and Tehran a diplomatic off-ramp.

​Secondly, while Iran’s Parliament may issue defiant rhetoric, the real decision-making power lies not with legislators but with the Supreme Leader and his inner circle. That group understands a key strategic reality: shutting down the Strait of Hormuz would be an act of national self-sabotage.

​The Strait of Hormuz may be a vital artery for about 20% of global petroleum liquids, but a closure would hurt Iran’s allies more than its enemies. Asia, not the West, would bear the brunt of the fallout.

​Around 75% of Asia’s oil imports flow through Hormuz, while Western countries rely on it for only 10–15% of their oil. China alone receives over 1.6 million barrels per day via this route, mostly from Saudi Arabia and Iraq. Over 80% of its crude oil imports pass through the Strait. If Iran were to disrupt this flow, China would feel the pressure immediately, potentially triggering an expensive and logistically complex scramble for alternative supplies - at a time when Chinese refinery margins are already stretched thin.

​Thirdly, oil isn’t the only concern. China and Qatar have become tightly linked through liquefied natural gas (LNG). Qatar now supplies 21% of the world’s LNG, much of it shipped through Hormuz.

​In recent months, Qatar has signed 15 long-term LNG agreements with China and the UAE, totalling nearly 30 million metric tons per year. Earlier this year, Qatar overtook Australia as China’s largest LNG supplier.

​Even a minor incident in the Strait - such as a vessel collision - could send shockwaves through global LNG markets, disrupting both spot and long-term pricing. Neither Qatar nor China can afford that level of risk.

​This raises a critical question: would Iran truly risk alienating its most important diplomatic and economic partners just to send a message? According to Stenos Signals the answer is almost certainly no.  

​Iran has worked hard to preserve practical trade relationships with both China and Qatar. Damaging those ties would be a strategic blunder. It would drive up Asian LNG prices, trigger crude oil price volatility, and destabilise regional shipping. More importantly, it would make Iran the author of its own diplomatic isolation.

​Historical oil price performance 

​Over the past five years, the Oil & Gas Exploration ETF (XOP) has returned a staggering 170%, outperforming theFTSE 100's 42% gain and the S&P 500's 98% advance.

​5-year OXP, FTSE 100 and S&P 500 performance 

​In technical terms, WTI crude oil remains under upward pressure as long as it holds above its 200-day simple moving average (SMA) and the 16 June low of $68.62-to-$67.88.

​WTI daily candlestick chart 

​Were a rise above the current June high of $77.57 to be seen, though, WTI could rally towards the $80.73 January peak.

​If Iran were to obstruct oil shipments through the Strait of Hormuz, prices could rapidly revisit the highs from October 2022 to September 2023, around $95.00 per barrel.

​WTI weekly candlestick chart 

​Historical context highlights risks of overreaction

​Despite current tensions, historical precedent offers useful perspective. Oil prices often spike on news of conflict, but unless infrastructure is physically damaged, sustained supply disruptions are uncommon.  

​For instance, in 2019, drone attacks on Saudi oil facilities temporarily removed 5% of global output. However, prices stabilised within weeks once operations resumed. Similarly, during the Iraq War, the Arab Spring, and Houthi attacks in Yemen, overall production continued despite significant regional turmoil. 

​What makes the Israel–Iran situation more alarming is the unpredictability and the potential for direct attacks on shipping routes or infrastructure. The geography of the Strait of Hormuz, combined with the military capabilities of both countries, perhaps makes a real disruption to oil flow more likely than in previous Middle Eastern conflicts that also caused temporary price spikes. 

​OPEC+ role and global supply dynamics 

​Amid these geopolitical developments, the response from OPEC+ and other major producers will be critical. Countries like Saudi Arabia hold spare production capacity that could be deployed if Iranian oil exports are disrupted. However, this depends on their willingness to remain outside the conflict. Strategic petroleum reserves in consumer nations provide some buffer, though they are a short-term solution and not a replacement for sustained production. 

​The US shale sector may eventually help stabilise supply if elevated prices persist, although its responsiveness has declined in recent years due to capital discipline and changing market dynamics. 

​Navigating volatile oil markets 

​Traders and investors navigating today’s oil markets must remain acutely aware of both geopolitical risks and technical price levels. Understanding the broader strategic context, as well as historical precedents and current vulnerabilities in the oil supply chain, is essential. 

Given the volatility and binary nature of outcomes, it’s important for market participants to align their risk strategies accordingly. IG offers access to both Brent crude oil and WTI crude oil via its trading platform, along with other energy-linked commodities. Traders can open an account through IG’s website and use tools such as guaranteed stops to manage potential downside in fast-moving markets. 

​With flexible options like spread betting and CFD trading, investors can position for both rising and falling prices. However, risk management is crucial, especially when news events can rapidly change sentiment and direction.

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