Oil prices have reached a three-month-high due to simultaneous geopolitical tensions in Venezuela and Iran, as well as the Black Sea. This has created a dangerous environment for investors, even though a massive supply glut is still hanging over the market. Brent crude began the year at a price of $61 per barrel before falling below $60 when U.S. president Donald Trump surprised the world by ousting Venezuelan leader Nicolas Maduro. The drop reflected the expectation that Washington would quickly restore Venezuela's oil production and exports, despite having one of the largest proven reserves in world. Oil?markets began to become less bearish once U.S. plans became more clear.

Trump threatened to intervene on behalf of protesters facing a brutal crackdown in Iran. The situation drove prices up 9% within a week, to $66 per barrel. The immediate threat is a disruption of supply in a volatile and unpredictable market. While bringing about a regime change in Tehran may eventually lead to more crude being available on the open markets, this could happen in the future. Drones have added to the tensions in the Middle East, and elsewhere, by attacking two oil tankers on the Black Sea, including one chartered for the U.S. energy giant Chevron. The tanks were approaching a Russian coast terminal that handles the majority of Kazakhstan's crude imports. The perpetrators are still unknown. The attacks on Western-operated tanks followed the U.S. seizure last week of a Russian flagged vessel in the Atlantic, increasing the likelihood that additional oil supplies will be drawn into conflict. These supplies could be huge. In 2025, combined oil exports from Venezuela and Iran as well as the Black Sea will reach 4.6 million barrels a day - approximately 4.5% of world supplies. Energy markets are less willing to factor in geopolitical risks in recent years. However, this figure is one that traders cannot ignore.

Back to Hormuz Among these geopolitical risks, Iran is the most significant. This is because the conflict could threaten the flow of oil and gas through the Strait of Hormuz - a narrow waterway that runs near Iran and through which 20% of the world's oil and natural gas are shipped. Tehran will not take this "nuclear" option, however, because it would shut down its crude exports. It would also likely prompt a swift response from the U.S. This was likely the regime's calculation during last year’s 12-day Israel/Iran war. Iran has other options as well, including targeting regional U.S. ally. The June attack by Tehran on the U.S. base at Qatar was not a major event, but a repetition could have a much different effect on the oil market. In 2019, an Iranian drone strike crippled Saudi Arabia’s Abqaiq production facility, knocking out global supplies and causing sharp price increases.

FORGET THE GLUT? Although the 9% increase in crude oil prices over the last week is noteworthy, they still remain in the relatively narrow range that they have been trading within for months. Why hasn't the 2026 explosion of geopolitical conflict caused a greater increase in crude prices? It is mainly because the increase in global crude oil supplies coincides with a sharp rise in demand. According to the U.S. Energy Information Administration, global inventories are expected to increase by 2.8 million barrels each day on average in 2026. According to Kpler, the amount of oil transported by tankers increased significantly in the last few months, reaching 1.3 billion barrels. This is the highest level since mid-2020 when global consumption plummeted due to COVID-19 locksdowns. The so-called "oil over water" is usually higher when the supply exceeds demand.

Around a quarter of this volume currently comes from Iran, Russia, and Venezuela. These are sanctionsed supplies, which would take longer to be purchased.

The figure is still high, and there are signs that crude oil and product inventories have also risen on the land.

The oil price curve suggests that traders do not expect a large build.

In recent weeks, the price of Brent crude has shifted to a structure called backwardation. This means that they are trading at a higher premium than contracts for delivery towards the end 2026.

Contango is a structure whereby the immediate price must be lower than the future price to make storage profitable. The discrepancy between the physical market's price curve and its actual value is likely due to the inability to see the "shadow fleet" or large tankers that transport sanctioned oil, as well as China’s opaque storage.

In addition, traders will have to speculate about the possible outcomes of the complex and rapidly changing political situations in the three major oil-exporting countries, before determining the impact of these events on the supply. Investors are faced with a wide range of outcomes and prices will remain volatile until some of these questions are answered.

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(source: Reuters)