Oil markets are once again pricing in geopolitical risk as tensions between the United States and Iran intensify. Brent crude has climbed above $71 per barrel, while West Texas Intermediate trades near $66.50, marking the highest levels since last summer. The key question facing investors is whether current diplomatic brinkmanship escalates into direct military action — and how aggressively energy markets would respond.

Recent comments from U.S. officials and visible military deployments in the region have raised the probability of conflict in traders’ models. Prediction markets now assign roughly a 56% chance of U.S. strikes before the end of March. Yet price action remains measured, suggesting investors are not fully pricing in a sustained disruption — at least not yet.

From Diplomatic Uncertainty to Military Risk Premium

Talks between Washington and Tehran over uranium enrichment limits have shown tentative progress, with Iranian officials referencing a “general agreement” on guiding principles. However, parallel military buildups — including a second U.S. aircraft carrier in Middle Eastern waters — have elevated the geopolitical risk premium embedded in crude prices.

According to Rystad Energy’s geopolitical analysis, a limited and targeted strike could trigger a swift $10 per barrel spike before prices normalize. A broader or prolonged campaign, particularly if it provokes retaliation against regional oil infrastructure, could drive a more durable increase of up to $15 per barrel.

Such a move would mirror price behavior observed during the brief Iran–Israel confrontation in mid-2025, when oil initially rose 4% before surging more than 10% following airstrikes. Markets tend to reprice rapidly when rhetoric translates into kinetic action.

The Strait of Hormuz: The Structural Vulnerability

Iran holds the world’s third-largest proven crude reserves and ranks among the top global producers. Yet the greater market sensitivity lies not in Iranian production itself but in the Strait of Hormuz — one of the world’s most critical oil transit chokepoints.

Approximately 20 million barrels per day of petroleum products pass through the strait. Even with alternative pipeline dispersion, energy intelligence firm Kpler estimates that roughly 9 million barrels per day — about 9% of global oil demand — would remain structurally at risk if sustained interference occurred.

Although Iran has historically threatened to close the strait during periods of heightened tension, it has never fully done so, partly because the route is essential to its own exports. Analysts broadly consider a full closure unlikely but acknowledge that even temporary disruption could ignite sharp volatility.

Political Constraints and Market Psychology

The domestic political calendar adds complexity. With U.S. midterm elections approaching and inflation sensitivity high among voters, a sharp spike in gasoline prices would carry political costs. Some analysts argue this reduces the probability of a prolonged campaign, favoring limited operations if any.

Truist’s chief investment strategist has cautioned investors against overreacting to geopolitical headlines, noting that such events often generate short-lived price spikes rather than sustained trends unless supply fundamentals materially change.

Still, oil is currently trading in an elevated but stable range, reflecting a market in wait-and-see mode. If diplomacy prevails and sanctions ease, analysts estimate prices could fall roughly $5 per barrel as geopolitical risk premiums unwind. Conversely, any sustained military escalation would likely force a rapid repricing higher.

For investors in both U.S. and global markets, the next 10 days may prove pivotal. Energy equities, inflation expectations, and currency markets will all respond swiftly if tensions cross the line from rhetoric to action.