US-Iran Conflict Changes Oil Markets' Risk Pricing Forever
The current US-Iran conflict has changed how oil markets price risk, moving from sentiment-driven to physical flow disruption. This distinction carries enormous practical importance as sentiment-driven premiums dissolve when diplomacy resumes, but physical flow disruptions require time to resolve and cannot be undone with a press release.
Rystad Energy's Vice President of Commodity Markets, Janiv Shah, notes that while oil flows through the Strait of Hormuz have fallen sharply since March, the market has managed to absorb the disruption through inventory drawdowns, alternative supply routes, and spare production capacity. However, how much longer these mechanisms can continue to function as effective shock absorbers is a critical question.
The current conflict's unique combination of geopolitical and logistical factors has created three compounding vulnerabilities: global spare production capacity has been drawn down since the conflict began, strategic petroleum reserves have already been partially deployed during earlier conflict phases, and commercial crude and product inventories are running below pre-conflict baselines. This amplifies the price impact of each successive disruption event.
Rystad Energy has modelled four distinct conflict resolution pathways, each with a different probability weighting and implications for crude prices, refinery economics, and global trade flows. The scenarios include full resolution, narrow deal (managed recovery), prolonged stalemate, and fighting restarts.