Market Minute: War Premium Underpriced

While equity markets continue to face selling pressure, oil markets have managed to stabilize—for now—following a period of volatility driven by concerns over slowing global demand and the potential for increased supply from OPEC+ in the coming months. One notable factor that remains underappreciated by energy traders is the war premium, particularly considering escalating tensions between Iran and the United States. Could this be the next catalyst to push energy prices higher?

Tensions with Iran have been simmering for some time, but recent developments suggest a potential escalation. Reports indicate that the United States has deployed at least four B-2 stealth bombers along with refueling aircraft to the Diego Garcia military base in the Indian Ocean—a clear show of force aimed at Tehran. In a recent interview with NBC, President Trump threatened "bombing" and hinted at secondary tariffs, raising the stakes further. While a diplomatic resolution is still possible—and preferable—some of the U.S.'s current maneuvers bear a concerning resemblance to the lead-up to Operation Iraqi Freedom in March 2003.

What would a direct conflict with Iran mean for energy markets?

Iran is already under significant economic strain due to sanctions that have hit its broader economy and energy sector. Despite this, the country still exports an estimated 2.3 to 2.8 million barrels per day of crude oil and condensates, with a substantial portion going to China—another key player entangled in a trade dispute with the United States. A disruption that cuts even half of these exports could materially tighten the global oil market, likely pushing prices higher in the short term.

OPEC+, however, could act as a stabilizing force. With spare capacity in reserve, the group may be able to offset potential shortfalls from Iran. A key meeting scheduled for Thursday will address current and future production policies, and any decisions made could shape the near-term direction of oil prices.

While markets may currently be discounting the geopolitical risk premium, the potential for a U.S.-Iran conflict introduces a major upside risk to oil. With global demand already fragile and supply dynamics in flux, energy traders should keep a close eye on developments in the Middle East—this may be the storm brewing just beneath the surface.