Oil prices have experienced severe volatility alongside the escalating conflict in the Middle East, with Brent crude briefly approaching 120 USD per barrel. This marks a rare level of fluctuation in recent years. Since the United States and Israel launched attacks on Iran in late February, the energy market has been torn between supply disruptions and hopes for a ceasefire. March saw particularly dramatic price action with oil surging 51 percent in a single month. This historic rally was primarily driven by declining production and halted exports in the Persian Gulf, which rapidly exacerbated supply tightness. Looking back at the progression of the war, the oil market has alternated quickly between panic and risk relief.
On February 28, a joint US-Israeli airstrike on Iran resulted in the deaths of multiple senior officials, including then Supreme Leader Ali Khamenei. The conflict escalated swiftly as Iran retaliated by attacking infrastructure across multiple Gulf nations, throwing regional energy supplies into chaos. Because these strikes occurred over the weekend when markets were closed, tension accumulated rapidly. When markets opened on March 2, oil prices immediately gapped higher. Iranian attacks on vessels and energy facilities disrupted Gulf shipping, bringing energy exports from Qatar to Iraq to a near standstill. Market anxiety over supply disruptions reached a fever pitch. As the conflict entered its second week, hostilities expanded further. Early March saw the first attacks on Iranian oil facilities, propelling Brent crude to near 120 USD. US President Donald Trump stated that high oil prices were the cost of defeating Iran. Simultaneously, production cuts by the United Arab Emirates, Iraq, and Kuwait worsened an already tight supply situation.
Significant political shifts also occurred during this period. Iran announced that Mojtaba Khamenei, son of the late leader, would succeed him as Supreme Leader. His stance is widely viewed as more hardline. His close ties to the Islamic Revolutionary Guard Corps have deepened market fears of a prolonged conflict. By mid-March, the conflict escalated to target core energy infrastructure. Following an Israeli strike on the South Pars gas field, Iran launched a retaliatory attack on energy facilities in Ras Laffan, Qatar, causing another sharp spike in energy prices. The targeted gas field holds one of the largest natural gas reserves globally and maintains a critical strategic position.
The market did experience brief cooling periods. On March 23, news of contact between the US and Iran pushed oil briefly below 100 USD. Although Iran later downplayed the progress of these talks, the broader consensus was that this laid the groundwork for a future ceasefire. Tensions flared again in late March when Yemen Houthi forces fired missiles at Israel. This marked their first direct intervention and increased the risk of regional spillover.
April brought shifting dynamics. Trump signaled a de-escalation on April 7 by announcing a two-week pause on attacks targeting Iranian infrastructure. Negotiations failed to yield a breakthrough, and the US imposed a naval blockade on Iranian ports on April 13, driving oil prices higher once more. The following days saw intense market turbulence. On April 17, Iran announced the full reopening of the Strait of Hormuz to commercial traffic, leading to a single-day drop of over 10 percent in oil prices. Just days later, US forces seized an Iranian cargo ship in the Gulf of Oman. Iran responded by tightening control over the strait again amid reports of tankers being fired upon, prompting a swift price rebound.
The Strait of Hormuz remains under strict de facto control, leaving market supply risks unresolved. The Iranian military stated it would retaliate following the US Navy seizure of its cargo ship. Trump announced on Tuesday, April 21, that the ceasefire would be extended indefinitely, citing severe divisions within the government in Tehran that prevented a unified stance in negotiations. Iran subsequently decided not to attend the scheduled talks in Pakistan. This kept US Vice President JD Vance in Washington due to the refusal of a second round of meetings. Iranian Foreign Minister Abbas Araghchi criticized the US naval blockade in the Strait of Hormuz as an act of war and a violation of the ceasefire agreement, emphasizing that Washington must lift the blockade before negotiations can resume.
Commodity Context founder Rory Johnston noted that any news regarding the reopening of the strait could immediately trigger a 10 to 20 USD drop in oil prices due to the unwinding of speculative positions. He warned this relief would be temporary because supply chain bottlenecks, damaged infrastructure, and ongoing production outages would keep the market tight. Brent crude is likely to remain in the 80 to 90 USD range rather than returning entirely to pre-crisis levels. Johnston described this as the largest supply shock in the history of the oil market, pointing out that if supply fails to recover consistently, prices may need to rise further to destroy demand.
Analysis from UBS indicates that the current oil supply shock triggered by US and Israeli military action against Iran is the closest parallel in 50 years to the Gulf War of the early 1990s. During that period, the invasion of Kuwait reduced global daily supply by 4 million to 5 million barrels, representing about 6 to 7 percent of the total. This caused oil prices to surge approximately 80 percent in just two to three months. The current shock is even more severe. The impacted supply volume reaches 9 million to 10 million barrels per day, accounting for roughly 10 percent of global supply. Oil prices have climbed nearly 100 percent over a comparable timeframe, demonstrating that market supply and demand pressures are significantly higher than historical levels. Inventories are also projected to fall to localized lows in the near term. The analysis further highlights that in the first 10 weeks following the outbreak of the war, the current rally in oil prices has outpaced the performance of any geopolitical conflict over the past 46 years. This reflects acute market sensitivity to supply disruptions.
The future trajectory hinges on whether the Strait of Hormuz fully reopens to traffic. If the strait remains blocked, physical supply shortages threaten to drive energy prices even higher. Even if passage is restored, energy security concerns and the need to rebuild inventories make it unlikely for oil prices to revert to pre-war levels. Under the best-case scenario, UBS estimates that oil prices will stabilize in the mid 80 USD per barrel range, which is notably higher than the mid 60 USD levels seen before the conflict.