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07/10/2025 | Press release | Distributed by Public on 07/10/2025 08:42
Iran Conflict: Four Lessons Learned for the Oil Market
Iran Conflict: Four Lessons Learned for the Oil Market
Photo: DifferR/Adobe Stock
Commentary by Ben Cahill
Published July 10, 2025
Sometimes long-feared events have little impact. For many years, conflict over Iran's nuclear program threatened to place energy infrastructure in the line of fire and disrupt exports from the world's oil and gas heartland. Yet when this nightmare scenario came to pass, the oil market impact was limited. Traders were rightly skeptical that supply disruptions would occur. A modest oil price bounce quickly disappeared when it became clear that Iran had no appetite for an escalatory spiral, with Brent crude slipping back below $70 per barrel. Even war with Iran failed to reshape oil market sentiment-suggesting at least four important lessons.
First, the oil market continues to shrug off geopolitical risk. Since the Hamas attacks on Israel in October 2023, there has been no shortage of conflict in the Middle East. Yet these events have consistently failed to disrupt supply. The market is armed with information from tanker trackers and satellite surveillance of production facilities, export terminals, pipelines, and storage tanks. If problems occur, traders know within minutes or hours; otherwise, they discount risks. This shift in market sentiment was apparent as early as September 2019, when a price spike following attacks on Saudi Arabia's Abqaiq complex-one of the world's most important oil processing facilities-quickly subsided as rapid repairs, inventory drawdowns, and crude substitutions prevented a supply shortage. In the run-up to the conflict in Iran, traders were not convinced that Iran would close the Strait of Hormuz, since doing so would choke off Iran's own oil exports and a key source of export revenues. In short, the market has adopted a "prove it" approach to supply risk. This is good news for consumers, as it helps to blunt market volatility and price run-ups.
Second, a well-supplied market emboldens White House actions. President Trump's decision to bomb Iran's nuclear facilities showed that U.S. presidents now have more latitude to take such actions without fear of dire consequences for oil prices. In recent years, strong non-Organization of the Petroleum Exporting Countries (OPEC) production growth, largely from the United States but also Brazil, Guyana, and Canada, has diminished the pricing power of OPEC+. Production cuts by OPEC+ have also generated substantial spare capacity-5.4 million barrels per day (b/d) as of June, according to the International Energy Agency (IEA), although this number is gradually declining as OPEC+ increases output. Trump and future presidents may conclude from the events of the past week that the U.S. shale boom enables them to impose sanctions, launch airstrikes on oil-producing countries, or even attack energy infrastructure without market blowback. This confidence may be misplaced. U.S. oil imports from the Middle East have greatly decreased (so far this year, the United States has imported four times more oil from Canada than from all of OPEC). But energy prices in the United States still reflect global market conditions, so presidents do not have entirely free rein, especially if market conditions change. There are signs that U.S. shale output is slowing, as cautious producers curtail drilling and rig counts and frac spreads fall (although hedging from shale producers surged during the temporary price hike, providing some support for the rest of this year). This suggests that moving forward, the White House may find it challenging to tighten the screws on multiple oil producers such as Iran, Venezuela, and Russia.
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Ben Cahill
Senior Associate (Non-resident), Energy Security and Climate Change Program
Programs & Projects
- Energy Security and Climate Change Program
- Economic Security and Technology
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Third, after a brief interlude from the Iran conflict, there will be a renewed focus on OPEC+. Eight major OPEC+ producers are increasing output, and over the weekend, this group announced another larger-than-expected production adjustment of 548,000 b/d for August. By September, the Group of Eight could erase the remainder of the 2.2 million b/d in voluntary production cuts they instituted in November 2023. So far, the unwinding of these cuts has turned out well for OPEC+, partly because actual supply additions are lower than headline production adjustments suggest. It is also the peak summer demand period in the Gulf, so domestic consumption is eating up part of the additions.
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However, market balances in Q4 2025 and next year look tenuous, and the true test will come in the fourth quarter. The OPEC secretariat maintains a 2025 demand outlook of 1.3 million b/d-substantially larger than those of the IEA or U.S. Energy Information Administration. Saudi Arabia also just raised its official crude oil selling prices to all regions, which typically suggests confidence in the demand outlook. Either OPEC+ truly believes the market has the capacity to absorb its supply additions, or it is committed to recapturing market share and testing U.S. shale and other non-OPEC producers, even at the cost of lower oil prices for several quarters. By the fall, OPEC+ may have to decide whether to dig in and continue its supply additions, especially as it contemplates how to manage remaining tranches of groupwide production cuts.
Fourth, this may not be the end of conflict in the Gulf, and some of the triumphalism in Washington may be misguided. Israel's airstrikes decimated Iran's military leadership, and in the past two years, Iran has been greatly weakened by Israeli military successes against Hezbollah and other elements of Iran's "Axis of Resistance." Iran is bloodied and diminished. But the 12-day war also ended a period of optimism that regional diplomacy, de-escalation, and a focus on economic growth priorities would forestall conflict. Iran now presents a problem that will have to be managed for years to come. Its neighbors worry that even a weakened Iran retains the ability to cause trouble in the region. Events of the past few weeks suggest the principal threat is not to oil flows, but rather to the continued success of the Arab Gulf states in maintaining their reputation for safety and stability and attracting the investment capital required to meet their economic transformation goals.
The oil market correctly anticipated no major disruption from the Iran conflict. OPEC+ will hope that the market will absorb the extra barrels it is supplying sooner than expected, as it seeks to change the narrative and recapture market share from competitors, including U.S. shale.
Ben Cahill is a senior associate (non-resident) in the Energy Security and Climate Change Program with the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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Energy and Sustainability, Climate Change, and Energy and Geopolitics
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