Geopolitical Risk Premiums in the Oil Market: A Bearish Outlook for Strategic Long-Positions

The oil market in late 2025 has become a study in contrasts. On one hand, geopolitical tensions-from the Israel-Iran war to Houthi attacks in the Red Sea-have historically triggered sharp price spikes. On the other, a global supply surplus and robust non-OPEC production have muted the market's response to these shocks, creating a paradox where risk premiums are short-lived and fundamentals dominate price action. For investors considering a strategic long-position in energy commodities, the calculus is clear: while geopolitical risks remain a source of volatility, they no longer justify a bullish stance in a market increasingly defined by oversupply and weak demand.

The Diminishing Impact of Geopolitical Shocks

Geopolitical events have long been a double-edged sword for oil prices. The Russia-Ukraine war, for instance, initially drove Brent crude to $133.18 in March 2022 due to sanctions and supply rerouting, but prices collapsed within weeks as demand concerns overshadowed supply fears according to Morgan Stanley analysis. Similarly, the 2025 Israel-Iran conflict caused a 7–11% spike in Brent prices, yet prices reverted to pre-conflict levels within days. This pattern reflects a market that now demands sustained supply disruptions to justify repricing risk.

The key driver of this shift is the global supply surplus. By Q3–Q4 2025, non-OPEC producers-including the U.S., Brazil, and Guyana-had increased output by over 3 million barrels per day (MMBbl/d), while OPEC+ struggled to offset this with coordinated cuts. As a result, global oil inventories hit a 46-month high in June 2025, and the EIA forecasts a continued surplus of 2 MMBbl/d through 2026. Traders now require "clear evidence of sustained production losses" before adjusting prices, a stark departure from the reactive behavior seen in 2022.

OPEC+'s Limited Leverage in a Surplus-Driven Market

OPEC+'s attempts to stabilize prices have had mixed results. In 2023, surprise production cuts of 1.1 MMBbl/d briefly pushed prices to $86 per barrel, but subsequent cuts failed to move the needle as non-OPEC production gains and weak demand eroded their impact according to ING analysis. By mid-2025, the alliance shifted to a more flexible approach, gradually reversing cuts to align with market conditions as ING reports. This underscores a critical reality: in a surplus environment, OPEC+ lacks the leverage to counterbalance the flood of oil from non-alliance producers.

The alliance's planned pause on production increases in Q1 2026 further signals its acknowledgment of the surplus. However, this move is defensive rather than bullish, aimed at preventing a price collapse rather than stimulating demand. For investors, this suggests that OPEC+'s influence is waning, and its actions are increasingly reactive to market fundamentals rather than proactive in shaping them.

Institutional Recommendations: Diversify, Don't Long

Given the bearish undercurrents, institutional investors are advised to avoid strategic long-positions in oil. A report by ING's Think Tank highlights that the global oil market is projected to face a "large surplus" in 2026 as OPEC+ ramps up output while demand growth remains modest. Even geopolitical risks-such as U.S. sanctions on Russian and Venezuelan oil-are expected to have limited long-term impact.

Instead, energy investors are being directed toward alternative opportunities. Natural gas, for example, is gaining traction due to tightening supply-demand balances and rising demand from AI-driven data centers. Similarly, energy infrastructure MLPs are positioned as inflation hedges, particularly with U.S. natural gas production and exports on the rise. For those seeking exposure to commodities, a diversified index approach-targeting metals like copper and gold-is recommended to hedge against macroeconomic shocks.

Conclusion: A Market Defined by Fundamentals, Not Headlines

The oil market of 2025 has evolved into one where geopolitical risk premiums are fleeting and fundamentals reign supreme. While events like the Strait of Hormuz tensions or U.S. actions in Venezuela can trigger short-term volatility, the market's resilience is underpinned by ample supplies and strategic reserves. For investors, this means that long-positions in energy commodities are increasingly speculative and ill-suited to a surplus-driven environment. The path forward lies in diversification and a focus on sectors-like natural gas and metals-where supply-demand imbalances are more structurally compelling.