Recently, the geopolitical situation in the Middle East has intensified rapidly, with renewed conflict between Israel and Iran sparking concerns over potential disruptions to Middle Eastern crude oil supply. As a result, international oil prices have experienced sharp volatility and significant gains. For example, on the New York Mercantile Exchange (NYMEX), the price of the August WTI crude oil contract surged to as high as $75.50 per barrel, currently hovering around $73. A market that was previously characterized by oversupply has now witnessed a short-term boost due to fears of supply constraints.
However, whether the oil market can sustain its rebound—and how high this recovery might reach—ultimately depends on the progression of the Israeli-Iranian conflict. If hostilities further escalate and broaden, or even evolve into a prolonged war, the risk of disrupted oil supply will rise considerably, leading to faster depletion of global inventories and potentially pushing oil prices to new highs. Nevertheless, under a baseline scenario, it is likely that the crisis will not continue expanding for long and will probably end with negotiation and compromise from one side. With global economic growth expected to slow in 2025 and oil demand remaining weak, any rebound in oil prices could be limited.
Geopolitical Crisis Fuels Oil Supply Concerns
Since June 13, military clashes between Israel and Iran have persisted for four days, heightening market anxieties about the outlook for Middle Eastern oil supply. This round of conflict, unlike the brief skirmishes in April and October 2024, has seen a marked intensification, with both sides now directly targeting each other's oil infrastructure. Israeli attacks have struck Iran’s South Pars gas field, while Iran has launched missile strikes on a refinery in Israel’s Haifa Bay, forcing the facility to shut down completely.
Moreover, Iran has threatened that it will block the Strait of Hormuz—a critical chokepoint for global oil transport—if the United States becomes involved. Any disruption or blockade of this route would inevitably drive up transportation costs.
However, a total Iranian blockade of the Strait of Hormuz remains highly unlikely for several reasons. First, while the strait is 35 to 60 miles wide, most of its waters are under Omani, not Iranian, control, allowing ships to bypass Iranian territory via Omani and UAE waters. Historically, while Iran has issued threats to close the strait—such as in 2011, 2012, and 2018—it has never actually done so, due to significant practical constraints. Second, Iran's own domestic needs are heavily dependent on imports via this route, so closing it would inflict the greatest harm on Iran itself. Third, blocking the strait would do little to advance Iran's geopolitical objectives, but would instead strain international relations and provoke widespread regional and global dissatisfaction. In the face of Israeli attacks, Iran is reluctant to draw global ire or escalate the conflict further.
Low Oil Prices Affect Production Increases
Since 2022, OPEC+ has implemented multiple rounds of production cuts to stabilize international markets, including a formal cut of 2 million barrels per day, a voluntary reduction of 1.66 million barrels per day, and an additional voluntary cut of 2.2 million barrels per day. In December 2024, OPEC+ agreed to gradually reduce these production cuts starting in April 2025, with a monthly increase of approximately 138,000 barrels. The actual plan involves raising production by just 137,000 barrels per month. However, in reality, eight OPEC+ member states intend to increase output by 411,000 barrels per day in June and July, representing 37.3% of the additional voluntary cut.
In the United States, persistently low oil prices have led to a decline in the number of active rigs in shale-producing regions. Baker Hughes data shows that as of the week of June 13, the number of active U.S. oil rigs had decreased to 439, compared to 488 in February. For the week of June 6, U.S. crude oil production fell to 13.428 million barrels per day, down from a high of 13.604 million barrels per day in December last year.
Russian crude oil production and exports have also declined due to market oversupply, with U.S. sanctions having only a limited effect. According to the International Energy Agency, Russia’s May crude output dropped by 100,000 barrels to 9.1 million barrels per day, while oil and petroleum product exports fell by 230,000 barrels per day to 7.3 million barrels per day.
Outlook for Oil Demand Remains Weak
The tariff policies of the Trump administration are expected to deal a blow to the global economy in 2025, and organizations such as OPEC, the IEA, and the EIA have all revised down their forecasts for global oil consumption growth in that year. In its May Short-Term Energy Outlook, the U.S. Energy Information Administration predicted that, over the next two years, global economic growth will slow and demand for crude oil and other fuels will cool accordingly. The agency forecasts global oil consumption in 2025 to average 98.6 million barrels per day, a 1.3% year-on-year decline—the first annual contraction in demand since 2009. Meanwhile, the global energy transition is gathering pace, raising the prospect of an earlier peak in oil demand. EIA models suggest that if countries strictly implement the Paris Agreement, global oil demand could fall as low as 85 million barrels per day by 2030.
Market Outlook
Overall, the global economy in 2025 will face multiple headwinds, including U.S. tariffs, debt issues, and uneven development, increasing the pressure of oversupply in the oil market. In the short term, however, geopolitical tensions are limiting supply and temporarily easing oversupply pressures. Coupled with low prices restraining U.S. shale output, crude oil prices have some momentum for a rebound from current low levels. Nevertheless, any significant price recovery at higher levels must be approached with caution, as the risk of a pullback remains.
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