Assessing the Geopolitical Risk Premium in Oil Markets Amid US–Iran Tensions

The geopolitical risk premium in oil markets has long been a barometer for investor sentiment, but the 2025 escalation of U.S.-Iran tensions has brought this dynamic into sharp focus. As regional conflicts and strategic energy positioning reshape global supply chains, understanding how limited conflict scenarios-such as targeted strikes, sanctions, or indirect proxy wars-affect oil prices is critical for investors. This analysis dissects the interplay between geopolitical volatility and energy markets, emphasizing the nuanced role of strategic reserves, sanctions evasion, and the differential impact of limited versus full-scale conflict.

2025 Tensions and the Volatility Cycle

The June 2025 conflict between Israel, Iran, and the United States exemplifies how short-term geopolitical shocks can rapidly reprice oil markets. According to a Reuters report, oil prices surged nearly 3% following Israeli military strikes on Iran, with Brent crude hitting a five-month high as traders priced in fears of Strait of Hormuz disruptions. Goldman Sachs estimated a $10-per-barrel geopolitical risk premium at the peak of tensions, driven by reduced Iranian exports and the specter of broader conflict. However, this premium proved fragile. A subsequent ceasefire between Israel and Iran caused prices to drop 6%, while Iran's decision not to disrupt shipping through the Strait led to a further 7% decline. This volatility underscores a key insight: the risk premium in oil markets is highly sensitive to the trajectory of limited conflicts, with rapid reversals as perceived threats recede.

Strategic Energy Positioning and Sanctions Evasion

Beyond direct military actions, Iran's strategic energy investments have indirectly influenced global dynamics. In late 2025, Iran delivered 175,000 tons of jet fuel to Myanmar via tankers like the Reef and Noble, enabling intensified airstrikes on civilian infrastructure. Simultaneously, Iran's refining investments in Venezuela-exposed after the fall of President Maduro-highlighted its role in circumventing U.S. sanctions. These operations, including projects at El Palito and Paraguana Refining Center, were part of a sanctions-evasion model that shielded Tehran from direct financial penalties. While these activities did not directly escalate U.S.-Iran tensions, they illustrate how secondary markets and proxy engagements can sustain energy flows and geopolitical influence, complicating efforts to isolate Iran economically.

Limited Conflict vs. Full-Scale Escalation

The European Central Bank's analysis of geopolitical shocks reveals a critical distinction between limited conflict scenarios and full-scale wars. Targeted strikes, such as Israel's June 2025 attacks on Iranian nuclear sites, initially drove Brent crude to $74/bbl but had short-lived effects as markets adapted. In contrast, full-scale conflicts-like the Russia-Ukraine war-generate prolonged volatility, with initial price spikes followed by stabilization as supply adjustments and demand shifts take hold. This duality suggests that investors must differentiate between transient spikes from limited actions and sustained trends from broader wars. For instance, the June 2025 conflict caused temporary disruptions at Iran's South Pars gas field but did not trigger the systemic supply shocks seen in 2022.

Strategic Reserves and Policy Responses

Global oil reserve policies in late 2025 reflected cautious adjustments to U.S.-Iran tensions. The U.S. experienced an unexpected tightening in crude inventories amid Trump-era threats of military action, compounding market anxieties. Meanwhile, the EU's trade negotiations with the U.S. added economic uncertainty, amplifying the risk premium. The Strait of Hormuz remained a focal point: of closure could disrupt 20 million barrels of daily oil flows, with rerouting and spare capacity measures offering limited immediate relief. These dynamics highlight the importance of strategic reserves as both a buffer and a political tool, with nations balancing stockpiling against diplomatic and military posturing.

Investment Implications

For investors, the 2025 experience underscores three key principles:
1. Short-Term Volatility, Long-Term Resilience: Geopolitical risk premiums are often ephemeral, with markets quickly repricing risks as conflicts de-escalate. However, prolonged tensions-such as Iran's sustained influence in Myanmar or Venezuela-can create structural shifts in energy flows.
2. Diversification of Exposure: Proxied investments in refining infrastructure (e.g., Venezuela's refineries) or alternative routes (e.g., expanded pipeline networks) may offer asymmetric returns amid regional instability.
3. Scenario Planning: Distinguishing between limited conflicts and full-scale wars is critical. Sanctions, targeted strikes, and proxy engagements typically generate sharp but temporary price swings, whereas broader wars trigger multi-year volatility.

Conclusion

The 2025 U.S.-Iran tensions have reaffirmed the geopolitical risk premium's role as a double-edged sword for oil markets. While limited conflicts can drive sharp price spikes, their effects are often short-lived, contingent on the durability of diplomatic or military resolutions. Strategic energy positioning-whether through sanctions evasion, proxy alliances, or reserve adjustments-adds layers of complexity to this calculus. For investors, the lesson is clear: navigating oil markets in a fractured geopolitical landscape requires not just tracking headline events, but dissecting the interplay of regional power dynamics, infrastructure resilience, and policy responses.