Oil’s Volatility in the Shadow of Conflict

The dramatic events of June 13, 2025, underscore just how sensitive global oil markets remain to geopolitical shocks in the Middle East. Oil prices soared by up to 10% on Friday morning after Israel launched direct airstrikes on Iranian targets, marking a significant escalation in the regional conflict. Within hours, traders, investors, and policymakers around the world were confronted with surging prices and heightened uncertainty, as fears mounted over the security of energy supply routes and the specter of a broader regional war.

Quantitative Snapshot: Market Reaction in Numbers

In the immediate aftermath of the strikes, Brent crude futures jumped above $78 per barrel—a spike of more than 10% in a matter of hours. West Texas Intermediate (WTI) briefly surged toward $77. As trading stabilized, prices settled around $74–$73, but volatility remained extreme and market participants closely monitored the next moves from both Iran and Israel.

Friday’s trading saw exceptionally high volumes and sharp swings as hedge funds, institutional investors, and commodity traders rushed to adjust their positions. Analysts noted that the magnitude of the price spike was also fueled by short-covering and the activation of stop-loss orders, amplifying the move in both physical and financial markets.

Drivers of the Rally: What’s Pushing Prices Higher?

The global energy market has long operated on a knife-edge, balancing between growing demand, supply disruptions, and chronic geopolitical risks. Iran is the third-largest oil producer in OPEC, pumping more than 3 million barrels per day—of which 1.6–1.8 million barrels are exported.

Any direct threat to Iran’s production infrastructure or to the free flow of oil through the Strait of Hormuz—a critical maritime chokepoint for up to 20 million barrels of crude daily—has the potential to upend global supply. While Iranian threats to block the Strait are not new, direct military escalation introduces immediate risks: supply interruptions, soaring maritime insurance costs, and logistical bottlenecks that quickly feed through to the global market.

Strategic Context: Israel’s Aims and the Risk of Escalation

Israel’s stated aim was to conduct “preventive and precise” strikes against Iran’s nuclear program and ballistic missile capabilities. According to Israeli military spokespersons, “the IDF has begun precision preventive strikes this morning against Iran’s nuclear program.” Prime Minister Netanyahu emphasized that the operation would continue “for as many days as needed to remove this threat.”

Iran’s immediate response was to launch over 100 drones at Israel, opening the door to further escalation, including possible missile attacks or strikes on critical infrastructure. Energy traders and geopolitical analysts are closely watching for any sign of conflict spillover into the wider region—particularly any threat to commercial shipping or energy facilities.

Economic Impact: Market and Policy Reactions

The market’s initial reaction was swift and severe: oil prices jumped, volatility spiked, and energy-related insurance costs surged. Global equities, particularly in sectors like aviation, manufacturing, and chemicals (all heavily exposed to energy costs), faced downward pressure as investors weighed the risk of sustained price increases.

On the diplomatic front, the US State Department stressed that America was not involved in the strikes and warned Iran against targeting US interests. This posture reflects an attempt to limit escalation while maintaining strategic ambiguity in support of Israel’s security concerns.

Risk to Iranian Exports and Global Supply

Rebecca Babin, senior energy trader at CIBC Private Wealth, summed up the supply threat: “The immediate risk is to Iranian exports, which could sharply decline from the current 1.6–1.8 million barrels per day if maximum pressure tactics increase or wider disruptions occur.” Even a brief disruption to Iranian exports could tighten a market already grappling with reduced Russian output, OPEC+ supply management, and recovering demand in Asia.

There is also the risk—still uncertain, but growing—of direct strikes on Iranian oil infrastructure by Israel. Such an event could push prices much higher, trigger retaliatory action, and force oil-importing countries to scramble for alternative supplies.

The Hormuz Factor: Chokepoint Risk in Focus

Military conflicts in the Middle East affect oil prices through three main channels:

1. Direct threats to production and transport infrastructure (wellheads, export terminals, refineries).
2. Disruptions to export routes, especially the Hormuz Strait, through which about a fifth of the world’s oil supply passes.
3. Psychological effects—market fears, risk premia, and speculation that drive volatility and magnify every headline.

Iran has repeatedly threatened to block the Strait in response to Western pressure. While actual closure remains a worst-case scenario, any credible threat is enough to send insurance costs soaring and prompt rerouting of tankers, with ripple effects across global commodity markets.

Macro Backdrop: Oil Markets Enter 2025 on a Knife Edge

Before the current escalation, oil prices had been trading in a relatively stable $65–$70 range, supported by steady demand from China and India, reduced Russian exports, and coordinated OPEC production cuts. The Israel-Iran conflict has injected new uncertainty into this balance. Any protracted disruption or military escalation could push prices toward $85 or even higher, while a quick de-escalation would likely see a retracement to the $70–$75 zone.

Broader macroeconomic implications are significant: higher oil prices threaten to reignite inflation, force central banks to delay or reverse rate cuts, and weigh on global growth prospects. Sectors sensitive to energy costs—airlines, transportation, manufacturing—are already bracing for further shocks.

Looking Forward: Scenarios and Risks
For the coming weeks, high volatility is likely to persist as long as military or diplomatic resolution remains elusive.
Escalation scenario: Direct attacks on oil infrastructure or a closure of the Strait of Hormuz could propel Brent crude to $85 or above, spark a surge in market volatility, and trigger government intervention in strategic reserves.
De-escalation scenario: Quick diplomatic action could calm markets, with prices returning to the pre-crisis range as supply fears subside.
In the near term, energy and defense stocks may benefit, while airlines and heavy industry face margin pressure. Currencies may also be affected, with the US dollar potentially strengthening as investors seek safe havens.
Conclusion
The Israeli airstrikes on Iran have sent shockwaves through the global oil market, sending prices sharply higher and raising fears of a broader regional conflict. The strategic importance of the Middle East, the critical role of the Hormuz Strait, and the centrality of Iranian supply mean that every escalation is quickly felt worldwide. The coming weeks are likely to remain volatile, as markets react to military moves, diplomatic signals, and shifts in global risk appetite.