Infographic: Oil market braces for supply risks as Middle East tensions escalate

Oil prices face significant upside risk from potential disruptions to Iranian supply in the wake of Israel's latest strikes, but market fundamentals remain bearish and most analysts see the price spike short-lived unless energy infrastructure is targeted, something both sides seem keen to avoid.

Brent crude futures surged more than 10% on June 13, spiking above $78/b in the largest single-day jump since 2022, after wide-ranging Israeli strikes targeting Iran's nuclear program sparked fresh uncertainty over supply disruptions from potential regional escalation. By 16:00 GMT, Brent had given up some of the gains to trade at $73.15/b, up 5.5% day over day.

Israeli Prime Minister Benjamin Netanyahu said the strikes, which reportedly hit military and nuclear targets across Iran, "would continue for as many days as it takes." Iran called the strikes a "declaration of war" and launched around 100 drones towards Israel early on June 13, many of which were intercepted, according to the Israel Defense Forces.

In a scenario where Iran's oil export infrastructure is damaged, Goldman Sachs said Iran's oil supply could be reduced by 1.75 million b/d for six months before gradually recovering. Making the assumption that OPEC+ makes up half of the peak Iranian shortfall from its spare production capacity, the bank estimates that Brent could peak over $90/b before falling back to the $60s in 2026 as supply recovers.

"Oil prices could rise even more sharply in extreme tail scenarios, where broader regional oil production or shipping is negatively affected," Goldman oil analysts said in a note.

Although further retaliatory attacks from Iran are expected, oil analysts at S&P Global Commodity Insights believe the oil price upside could fade unless exports are affected.

"When Iran and Israel exchanged attacks previously, prices spiked initially but fell once it became clear that the situation was not escalating and there was no impact on oil supply," Commodity Insights analysts said in a note.

While Goldman incorporated a higher geopolitical risk premium into its oil price outlook, the bank said it still assumes no disruptions to oil supply in the Middle East and continues to forecast that strong supply growth outside US shale will reduce Brent/WTI oil prices to $59/$55/b in the fourth quarter of 2025 and to $56/$52/b in 2026.

Escalation fears

So far, both sides have refrained from targeting energy infrastructure, which analysts said could be a sign of restraint – and an acknowledgement that retaliation could damage the country's ability to meet its own domestic demand and export oil and gas.

Israel, which supplies gas to nearby Egypt and Jordan, has temporarily shut in its Leviathan gas field as a precaution, while Iran said its oil refineries and depots were not damaged in the initial attack.

"Attacks on energy infrastructure aren't simply a tit-for-tat situation where, for instance, Israel could go after an Iranian export terminal and Iran might retaliate by trying to hit an Israeli offshore gas field," said Colby Connelly, a senior fellow at the Middle East Institute. "These assets are to one degree or another, linked with global markets."

Iran holds about 2.2 million b/d of crude refining capacity and another 600,000 b/d of condensate splitter capacity. Iran pumped about 4 million b/d of crude and condensate in May, according to Commodity Insights, from its host of oilfields, which largely lie in the west of the country. Commodity Insights had expected Iran's crude exports to drop to below 1.5 million b/d in May.

Escalation of tensions could, however, boost freight rates, tanker insurance premiums, narrow the Brent-Dubai spread and hurt refinery margins, particularly in Asia, Commodity Insights analysts said.

"If Iranian crude exports are disrupted, Chinese refiners, the sole buyers of Iranian barrels, would need to seek alternative grades from other Middle Eastern countries and Russian crudes," they said.

Hormuz chokepoint

A warning by US President Donald Trump that further Israeli strikes could be "even more brutal" has stoked fears that Iran might close the strategic Strait of Hormuz in retaliation.

The Strait of Hormuz is a crucial transit for LNG shipments from Qatar and the UAE and around 20-25% of global oil passes through the strait. Gulf nations are reliant on the strait to get their crude to international markets, and only Saudi Arabia and the UAE have pipelines that can circumvent the waters between Iran and Oman.

But analysts say Iran closing it is unlikely as it would signal a major escalation that neither side seems to want right now.

"If Iran closed the Strait of Hormuz, the US would come in with all guns blazing," Ken Pollack, vice president for policy at the Middle East Institute, said at a June 13 press briefing.

Israel has reportedly given Iran and the US until June 15 to reach a nuclear deal, where fizzling talks prompted initial Israeli action.

The US and Iran have held multiple rounds of talks to reach a new nuclear deal, but Israel and the US have staunchly opposed any agreement that would let Iran enrich uranium.

On June 12, Iran's atomic organization chief, Mohammad Eslami, said the third uranium enrichment facility was ready for centrifuge installation, and the International Atomic Energy Agency's board of governors formally declared the same day that Iran breached its non-proliferation obligations for the first time in 20 years.