Crude oil prices on Thursday settled at the highest in six months, with Brent crude topping $71 per barrel and WTI over $66. However, this may be just the start of a much stronger rally—it all depends on developments between the United States and Iran.
The latest round of negotiations between the two on Iran’s nuclear program started well enough, with both sides signaling they wanted to make a deal. Iran’s Foreign Minister signaled there was progress being made, saying the negotiating teams had agreed on “guiding principles.” However, there were still sticking points, and while these were not detailed by anyone in an official capacity, the U.S. president apparently lost patience and issued a grave warning to Iran: make a deal or “Otherwise bad things happen.”
In evidence of just how fast geopolitical tensions could escalate, Iran responded with its own warning, saying that “in the event that it is subjected to military aggression, Iran will respond decisively and proportionately” in a letter to the United Nations.
“All bases, facilities, and assets of the hostile force in the region would constitute legitimate targets,” Tehran also warned. “The United States would bear full and direct responsibility for any unpredictable and uncontrolled consequences.”
Backing these warnings with actions, the United States has been building up its already sizable military presence in the Persian Gulf, while Iran has been engaging in military drills, first in the Strait of Hormuz earlier this week, and then in the Gulf of Oman, together with Russia.
In such an environment, it is actually surprising that oil prices have now soared much higher. Iran is, after all, a major oil producer, with over 3 million barrels in daily output. Non-OPEC production growth is great for global supply numbers and the glut story still dominates energy reporting, but the disruption of 3 million barrels in daily production can hardly be brushed off, especially if the conflict spreads across the Middle East.
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Indeed, Reuters columnist Clyde Russell noted this week that oil traders are acting as though they expect that “everything will turn out fine”. There is a very good reason for such expectations. President Trump may want to make Iran stop its nuclear program, but he also wants gas for American drivers to remain cheap—and that won’t be possible with a war in the Middle East. There is also the reputational aspect of Trump presenting himself as a peacemaker, although an argument could be put forward that the ultimate goal of what the U.S. is doing to Iran is peace.
There is still a risk of further escalation leading to an oil supply disruption, however. And it may come at a bad moment for those who assume the world is oversupplied with crude oil. It was this assumption that kept a lid on prices over the past year or so despite earlier flare-ups in the Middle East and the sanctions against Russia. There was too much oil in the world anyway, so disruptions would not threaten availability, the assumption went. But this week served more bullish news that could challenge that assumption.
Earlier this week, the Joint Organizations Data Initiative reported that global oil demand had dropped by over 600,000 barrels daily in December 2025 compared to the previous month and by over 530,000 barrels daily from a year earlier. Production of oil was higher, both within OPEC and outside it. However, inventories were down, by 22 million barrels to a total that was 111.7 million barrels below the five-year average. That does not really say glut.
“Oil glut predictions are seriously exaggerated,” Saudi Aramco’s chief executive, Amin Nasser, said on the sidelines of the World Economic Forum in Davos last month. Global oil stocks are low, while the amassed barrels in floating storage on tankers are mostly sanctioned supplies, the CEO of the world’s biggest oil firm and top crude exporter said at the time.
What’s more, spare capacity has dwindled over the past year, also limiting potential efforts to boost output in case of major supply disruptions, said Nasser. “It (spare capacity) is at 2.5%, and we need a minimum of 3%. If OPEC+ further unwinds cuts, spare capacity will fall even further, and we will need to watch this very carefully,” he said.
Put the risk of a war in the Middle East next to the lower spare capacity and sanctioned barrels, and the glut begins to look quite a bit less certain. Of course, it should be noted that the risk of war should not be overestimated, as well as underestimated. As Reuters’ Russell noted in his column, the track record of wars in the Middle East suggests the likelihood of an oil supply disruption is limited. Yet it is very much present, if only to make oil traders’ lives more difficult.
By Irina Slav for Oilprice.com
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