In the early hours of June 13 local time, Israel launched strikes on dozens of Iran’s nuclear-related facilities. In response, Iran vowed a “severe retaliation” and has since launched drones and missiles toward Israeli territory. The escalation of the Israel-Iran conflict has heightened global risk aversion, triggering a surge in international crude oil and gold prices, while equity assets broadly declined.
The escalation comes amid further destabilization of the Middle East—intensifying internal tensions and weakening external checks and balances. With the U.S. administration transition, the Trump administration’s foreign policy continues to adhere to the “America First” principle, leading to adjustments and, to some extent, a retrenchment of the U.S. strategy in the region. On one hand, U.S. constraints on Israel’s unilateral military actions have weakened; on the other hand, comprehensive containment of Israel’s adversaries has also shown signs of partial relaxation. However, following the “Al-Aqsa Flood” incident, the Middle East situation became further entangled, with both domestic and external conflicts intensifying across the region, necessitating stronger balancing forces. In recent years, the marginal influence of Iran and its allies (e.g., Syria) in Middle Eastern geopolitics has diminished, possibly prompting Iran to pursue a more aggressive path toward nuclear breakout. Although the U.S. and Iran resumed nuclear negotiations in April, progress has been slow. Iran’s continued advancement of its nuclear program has been cited by Israel as one of the key motivations for launching this round of strikes.
Given that this is Israel’s first strike on Iran’s nuclear facilities, and that it also targeted Iran’s electricity and energy infrastructure, the short-term outlook for the Israel-Iran situation is likely to become more tense, with risks of entering uncharted territory.
The rapid escalation of the conflict has sharply driven up oil prices, with international crude oil prices surging by more than 12% at one point, before retreating to a 7% gain. However, prior to the conflict, fundamental and technical factors had already pushed oil prices into a short-term upward trend, which was further amplified by the escalation. On April 9, the U.S. announced a suspension of retaliatory tariffs, and on May 12, China and the U.S. downgraded certain “restrictive” tariffs. Restocking demand and recovery-driven consumption had already lifted Brent prices from a low of $62.8 per barrel on April 8 to $69.4. In addition, as market sentiment was broadly bearish on crude oil, short-covering contributed to the volatility in prices. Specifically:
On the fundamental side, since the April 9 announcement of the temporary suspension of retaliatory tariffs—particularly after the May 12 easing of U.S.-China tariffs—global logistics have improved, and exporters rushed to ship goods before the July 9 deadline, boosting crude oil restocking demand. Following the April 2 U.S. announcement of retaliatory tariffs, international oil prices fell significantly, with Brent crude dropping by 16.2% in just a few days by April 8. The April 9 deferral prompted a mild rebound, but prices fell again as OPEC+ continued to raise output. Only after the May 12 tariff downgrade did prices begin to stabilize and recover. Global manufacturing PMI data for May showed that raw material inventories returned to expansionary territory, indicating the start of a global restocking cycle driven by recovering logistics and pre-tariff export rush.
On the technical side, the market had accumulated significant short positions in crude oil futures. Short covering may have further amplified the price surge. CFTC data show that short positions accounted for 33% of NYMEX crude oil futures open interest—at the 90th percentile since 2014. The Israel-Iran conflict sharply pushed up oil prices, and the resulting short covering may have further exaggerated the rally.
This latest escalation has had a more pronounced impact on oil prices than the Red Sea shipping disruption in mid-December 2023, though it has not yet reached the highs seen during the October 2023 Israel-Hamas escalation. While Iran contributes a limited share of global energy output, Israel’s declaration of a national emergency and the closure of airspace across several Middle Eastern nations suggest the conflict may disrupt energy production and transport beyond Iran itself. As of 2023, Iran accounted for just 3.9% and 6.2% of global crude oil and natural gas production, respectively, while the broader Middle East and North Africa region supplies 34.5% of the world’s crude and 21.5% of its natural gas. In contrast, during the Red Sea shipping crisis in December 2023, major global carriers suspended operations in the area after Houthi attacks, and Brent prices rose only 9.5% to $81 per barrel. Meanwhile, the October 2023 escalation of the Israel-Hamas conflict led to a 10% short-term spike in Brent to $92 per barrel.
In the short term, attention should focus on Iran’s “retaliation” tactics and intensity, and whether hostilities spread to other Gulf countries. At the same time, Iran’s internal political stability under the strain of “maximum pressure” warrants close monitoring. Iran has now officially withdrawn from nuclear negotiations with the U.S., and Supreme Leader Khamenei has vowed that Israel’s attack “must be severely punished,” promising that Iranian armed forces will not allow Israel to “go unpunished.” Looking ahead, the key questions include whether Iran’s retaliation will target other U.S. allies—thereby expanding the conflict to other Gulf states—and whether it might attempt to block the Strait of Hormuz, which connects the Persian Gulf and the Indian Ocean. Given Iran’s long-standing international sanctions and domestic economic woes, any deterioration in regime stability may increase the likelihood of a more extreme response. We will closely monitor developments.
Looking forward, due to the potentially significant impact on oil supply under extreme scenarios and the high level of uncertainty in the current situation, a further short-term surge or sharp volatility in oil prices cannot be ruled out. This could also affect global natural gas prices and shipping costs, possibly triggering broader price increases. In the medium to long term, however, oil supply and demand fundamentals do not support a sustained price surge. Currently, major Middle Eastern producers export about 17.5 million barrels of crude oil per day through the Strait of Hormuz, accounting for around 17.5% of global crude trade. In addition, roughly one-quarter of global natural gas trade also passes through the strait. If Iran were to block the Strait of Hormuz and/or expand retaliation to other U.S. allies—especially amid declining domestic regime stability—global oil and gas supply could be significantly disrupted in the short term, exacerbating price volatility in crude, gas, and shipping, and potentially pushing up a wider range of prices.
Nonetheless, over the medium to long term, oil prices are unlikely to remain elevated given ample spare capacity within OPEC+ and the Trump administration’s strong political will to lower prices. If oil prices remain high for too long, increased supply and geopolitical balancing efforts by other global powers may kick in. This pattern was observed during the early stages of the Russia-Ukraine conflict and the 2023 Gaza escalation. While geopolitical factors temporarily drove oil prices higher, those gains were eventually curbed as rising prices prompted increased supply and dampened demand. Similarly, global shipping rates declined after the Red Sea disruption, as global shipping capacity gradually recovered.