Brent crude oil prices surged as much as 7% on Thursday, reaching their highest since March 2022, following a report that the U.S. is considering military options to break the deadlock in negotiations aimed at ending the ongoing conflict with Iran. This development has amplified concerns over further supply disruptions from the Middle East, a critical region for global energy exports.
Geopolitical Tensions Escalate Over Iran Conflict
The report, citing an Axios investigation, indicated that U.S. President Donald Trump was scheduled to receive a briefing on potential military strikes against Iran. The aim of these strikes would be to compel Iran back to the negotiating table regarding its nuclear program. The U.S. and Israel initiated air strikes on Iran on February 28, leading to Iran’s retaliation by virtually halting all shipping through the Strait of Hormuz, a vital chokepoint for energy supplies.
Despite a ceasefire that has paused direct combat, the U.S. has maintained a blockade on Iranian ports. Negotiations to resolve the protracted conflict, which has resulted in thousands of casualties and what analysts describe as the world’s most significant energy disruption, remain stalled. The U.S. insists on addressing Iran’s alleged nuclear weapons program, while Iran demands control over the strait and reparations for war damages.
Market Reacts to Supply Disruption Fears
Brent crude futures for June delivery saw a significant increase, rising $6.81 (5.8%) to $124.84 a barrel as of 0527 GMT on Thursday, building on a 6.1% gain in the previous session. The more actively traded July contract climbed 3% to $113.78. U.S. West Texas Intermediate (WTI) futures for June also rose, up 2.6% to $109.64 a barrel.
Both major oil benchmarks are on track for their fourth consecutive month of gains. Since the beginning of the year, Brent prices have more than doubled, and WTI has seen an increase of over 90%, underscoring the tightening global supply situation. IG market analyst Tony Sycamore noted in a client note that the prospects for a near-term resolution to the Iran conflict or the reopening of the Strait of Hormuz appear dim.
Long-Term Supply Concerns and Demand Destruction
In a sign that the energy supply disruptions may persist, President Trump reportedly discussed mitigation strategies with oil companies regarding a potential months-long U.S. blockade of Iranian ports. This suggests a prolonged period of market uncertainty and potential supply constraints.
OANDA senior market analyst Kelvin Wong commented that market participants are currently prioritizing the dynamics of the U.S.-Iran conflict and the risk of a sustained closure of the Strait of Hormuz. This immediate concern overshadows the longer-term implications of the potential waning influence of OPEC+ following the United Arab Emirates’ (UAE) exit from the cartel.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, are expected to agree on a modest increase in oil output quotas, around 188,000 barrels per day, during their upcoming meeting. This decision follows the UAE’s withdrawal from OPEC, effective May 1, which is anticipated to weaken the group’s ability to control oil prices. However, analysts suggest that the UAE’s exit is unlikely to significantly alter market fundamentals this year, especially given the ongoing disruption from the Hormuz closure and other war-related production issues.
Demand Destruction as a Market Stabilizer?
With supply remaining tight and geopolitical risks elevated, analysts are increasingly looking at demand destruction as a potential, albeit unwelcome, factor to balance the market. ING analysts estimate that approximately 1.6 million barrels per day (bpd) of oil demand has already been lost as consumers and end-users are forced to reduce consumption due to persistently high prices.
While this reduction is significant, the ING analysts concluded that it is “clearly not enough to fill the supply gap we are currently facing.” This suggests that even with reduced demand, the market remains precariously balanced, vulnerable to further shocks.
What to Watch Next
Investors and policymakers will be closely monitoring any further escalation or de-escalation in U.S.-Iran tensions, as well as the outcome of the OPEC+ meeting. The continued closure of the Strait of Hormuz remains a critical factor influencing oil prices. Additionally, the effectiveness of demand destruction in mitigating supply shortages and the potential for further diplomatic breakthroughs or breakdowns will be key indicators to watch in the coming weeks and months.
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