Oil prices edged higher as fresh confrontations between the United States and Iran at sea and in the air re-ignited geopolitical risk premiums that had briefly faded from the market.

West Texas Intermediate (WTI) crude settled above $63 a barrel after an Iranian drone approached a U.S. aircraft carrier in the Arabian Sea and was subsequently shot down. The incident renewed fears of escalation in a region that remains central to global energy supply, particularly after signs in recent days suggested Washington might be easing pressure on Tehran.

Gains were briefly capped after White House Press Secretary Karoline Leavitt said Donald Trump prefers to pursue diplomacy “first” with Iran. Still, prices firmed again in post-settlement trading, rising as much as 3.3% as traders reassessed the balance between diplomatic signals and military risk.

Strait of Hormuz Back in Focus

Tensions were further underlined when Iranian vessels hailed an oil tanker participating in a U.S. military fuel-procurement program in the Strait of Hormuz, a critical chokepoint through which roughly one-third of the world’s seaborne oil flows. Tanker freight rates have jumped sharply amid concerns that any disruption in the strait could quickly tighten global supply.

According to Gregory Brew, a geopolitical analyst at the Eurasia Group, the market is currently pricing in a $3 to $5 per barrel risk premium tied to Middle East tensions. He argues that Washington’s diplomatic tone reflects confidence that the U.S. has sufficient leverage over Tehran, rather than a genuine de-escalation of pressure.

Diplomacy vs. Deterrence

The latest episode whipsawed investors who had been leaning toward a calmer outlook after reports that talks between the U.S. and Iran could begin within days. Iranian media also reported that a U.S. carrier strike group had moved farther away from Iranian waters toward Yemen, initially easing fears of an imminent clash.

Adding another bullish undertone, Trump said earlier that he would consider rolling back tariffs on India in exchange for Prime Minister Narendra Modi halting purchases of Russian oil — a claim not confirmed by New Delhi. Nonetheless, shipments of Russian crude to India have already fallen toward their lowest levels in more than three years, increasing the volume of unsold sanctioned barrels globally.

Fragile Balance for Crude Markets

Oil had surged in January despite persistent warnings of a potential global supply glut, supported by geopolitical risk and disruptions in some producing regions, including Kazakhstan. That rally faltered earlier this week as commodities broadly sold off alongside sharp declines in metals.

For now, crude prices remain caught between two powerful forces: fears of oversupply on one hand, and the ever-present risk of Middle East escalation on the other. As recent trading shows, even brief military encounters are enough to pull risk premiums back into the oil market — and remind investors how quickly sentiment can turn.