It seems like an age ago now, but we will all surely remember the runaway inflation of 2022 and oil’s peak above $100 a barrel that May. Since the ensuing crash, however, the oil supply has been relatively calm and prices stable at below-average levels, despite conflicts in several key producing regions. That all changed this week, though, when the US and Israel finally attacked the Islamic Republic of Iran after much posturing, igniting the Middle East in war and threatening regional oil supplies to Europe and Asia. From prices that held steadily around $60 per barrel for much of 2025, Brent quotes have now soared almost 40% as of late January to reach $83.69 today (5 March) and look set to continue their ascent as any attempt at diplomatic negotiations between the belligerents appear fruitless thus far. And the impact is likely to stretch far beyond the gulf, involving China and Europe too. The question of how disrupted the supply is ultimately going to be will also depend on interplay between OPEC+ countries and a possible return of Russian oil to the market.
Narrowing the Gulf
This war with Iran has been a long time coming, with talk of regime change circulating in Washington neoconservative circles since at least the early 2000s. In contrast to the US operation in Iraq, however, it looks like the Iranians are more prepared for a protracted conflict. Unfortunately, that also means the impact on GCC countries and the wider world is likely to be prolonged. The world’s second-biggest economy and Trump’s favourite trade adversary, China, is also likely to play a role with reduced demand expected on the general uncertainty of regional war. And now, with the closure of the Strait of Hormuz, the provision of raw materials to China and transport of its finished products to key markets in Europe, Africa, and the US are likely to be hampered and thus oil demand could fall. Excluding the very real possibility of deliberate destruction of refineries and production sites, this natural curtailment of demand should lead to price stabilization over time. However, it is still unclear how high prices might rise in the meantime until an equilibrium is found. The US shale industry will certainly be jubilant, as it appears prices above $70 a barrel are here to stay for the medium to longer term. Shale oil producers were barely profitable at long-term average prices of $60-65, and so the US lobby will have no reason to push for a resolution anytime soon. Nonetheless, it does feel as though we’re close to a logical peak now, barring any attacks on regional production infrastructure.
Changing suppliers
One point that is easy to overlook in black swan periods like now is just how controlled the oil market actually is. The careful balance between supply and demand is diligently maintained by national and supranational bodies working in close coordination with one another. For example, OPEC+ has been gradually reducing its pandemic-era production cuts for more than three years now and still hasn’t returned to pre-2020 levels, leaving plenty of room for supply-side correction if need be. OPEC+ will raise production by 206,000 barrels per day from April, it said in a statement on Sunday (1 March). The cartel had originally debated options ranging from 137,000 bpd to 548,000 bpd, according to five unnamed sources. This comes after a three-month pause in the output increases that had been incrementally returning 1.2 million bpd of production previously cut. It’s also important to consider the potential return to the open market of up to 10 million bpd of Russian oil, which will be easily transportable to key consumers like the EU and China. Trump has long spoken about his desire to bring the European conflict to a negotiated end, and now the incentive of oil price stability and energy security could be enough to bring all players to the table ready to compromise. It’s also important to note that Russian Urals, as a heavy crude, is a perfect alternative to Iranian oil for refineries set up to process this kind of high-density crude. Much remains to be seen, but it does appear that there are plenty of avenues for a return to lower per-barrel prices in the near term. Yet, given the advantages of higher oil prices for US shale companies’ competitiveness, we could see some reluctance from the US to resolve the conflicts that have led to elevated prices.
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