The oil market is experiencing its strongest start to a year in years, as a series of supply shocks and sanctions upend earlier predictions of a major surplus. This unexpected strength has traders scrambling to protect themselves against the rising possibility of renewed military action against Iran.
A surge in trading activity across futures and options markets is already pushing crude prices higher. Some analysts now see a risk premium of as much as $10 per barrel being factored into the market. This rally marks a sharp reversal from just weeks ago, when the dominant narrative focused on forecasts for a record glut.
Instead, the market has been tightened by unexpected supply disruptions in the United States and Kazakhstan, combined with a shunning of sanctioned crude. This situation has been amplified by geopolitical risk, particularly surrounding Iran, where a potential conflict threatens a region responsible for about a quarter of the world’s seaborne oil trade.
“You have a potential war, and that’s the overriding factor, but it’s in addition to a much tighter market than people anticipated,” said one veteran oil analyst turned hedge fund manager. “I would fasten my seatbelt and wouldn’t want to be short in this market.”
Trading data reflects this heightened anxiety. The number of Brent oil futures held has surged to an all-time high this year, while last month saw record trading in options to guard against a further price rally. Market volatility has jumped to its highest level since the last major incident in the region.
“It does feel that the probability of limited strikes and limited retaliatory strikes from Iran seems less likely this time around,” said a head of geopolitical analysis at a leading energy consultancy. “Right now I have the feeling it’s a nuclear deal, or a wider escalation, not something in the middle.”
That prices haven’t climbed even higher is a testament to the significant growth in global oil output over the past year. Production from both major producer groups and other countries reached record levels, leaving the world with a substantial supply cushion.
However, the first few weeks of the year demonstrated how quickly unexpected output curbs can erase that surplus. A deep freeze in the US led to one of the largest declines in American oil inventories this century, while a combination of attacks, maintenance, and bad weather slashed planned exports from a key Caspian Sea producer. These disruptions eroded Western stockpiles just when they were expected to grow.
The physical market is also bracing for impact. Some refiners in Asia, the world’s top consuming region, have begun inquiring about cargoes from outside the Persian Gulf to hedge against potential supply disruptions. Meanwhile, earnings for oil supertankers have soared, partly in anticipation of a US move, reaching their highest level since the pandemic.
