Iran's Geopolitical Risk Fuels Oil Market Fears

Oil prices climbed on Friday as renewed threats from U.S. President Donald Trump against Iran stoked fears of a potential supply disruption in the global market.

While Iran is not the world's largest oil producer, the escalating tensions have sent ripples through energy markets, highlighting the country's outsized influence on price stability.

Why Markets Are Driven by Fear, Not Just Output

Iran's daily oil production stands at approximately 3.4 million barrels per day, according to Kpler. This figure is significantly lower than the output from the United States, which produces around 13.5 million barrels per day, and Saudi Arabia, at 9.5 million barrels per day.

Despite this, recent protests within Iran, triggered by a sharp decline in its currency, have drawn a strong reaction from the U.S., including suggestions of military action. This has created a climate of uncertainty for energy traders.

"Oil markets are moving on fear," explained Helima Croft, global head of commodity strategy at RBC Capital Markets. "It's basically a concern about disruption."

Market anxiety intensified as President Trump signaled a heightened U.S. military presence in the region. "We're watching Iran," Trump stated on Thursday. "You know we have a lot of ships going in that direction just in case. We have a big flotilla going in that direction and we'll see what happens."

The president's comments follow a period of unrest in Iran, where over 5,000 people have died since protests began on December 28, according to the Human Rights Activists News Agency. Trump referenced the internal situation in a CNBC interview, stating, "They were going to hang 837 people. And I told them, you can't do that. If you do that, it's going to be bad."

The Problem of Shrinking Spare Capacity

While global oil supply is currently sufficient, the market has less of a buffer than it used to. Last year, OPEC and its allies, which collectively account for about 40% of the world's oil, increased their output. This move, however, also reduced their spare capacity—the ability to quickly ramp up production in a crisis.

This lack of a safety net is a major concern for the market. "If we were to get a confrontation between the U.S. and Iran that led to the loss of Iranian oil exports, there just isn't a lot left in the OPEC tank to cover that," Croft noted.

The Strait of Hormuz: A Critical Chokepoint

Iran's strategic location amplifies its impact on the oil market. Its proximity to major producers like Saudi Arabia and its control over critical shipping lanes raise the stakes of any regional conflict.

The Strait of Hormuz is a key chokepoint for global energy supply. According to the U.S. Energy Information Administration, approximately 20% of the world's crude oil flows through this narrow waterway.

"Iran's location is strategically very important," Croft said, adding, "we have seen Iran and Iranian-backed groups before target tankers and target critical infrastructure in the Gulf." In 2019, for example, Iran launched attacks on oil tankers operating in the strait, demonstrating its ability to disrupt this vital corridor.

The Limits of Economic Sanctions

Alongside military posturing, the U.S. is also applying economic pressure. President Trump confirmed that 25% tariffs on countries conducting business with Iran are "going forward."

However, existing sanctions have already severely curtailed Iran's crude exports. The country's oil is now sold primarily to independent Chinese refiners, who purchase it at a discount to benchmark prices. This reality raises questions about the effectiveness of further economic measures.

"Can you really squeeze Iran much more given where their barrels are going?" Croft questioned. She speculated whether sanctions have "lost the ability to kind of move the needle when it comes to Iranian policy."