Israel and Iran have been in conflict for the past five decades, largely through indirect confrontations. Recently, however, the United States has become more directly involved by intercepting Iranian attacks on Israel and conducting limited strikes, adding a new layer to the regional dynamics.
Years ago, such escalations in the Middle East would have triggered sharp jumps in oil prices.
When I first entered the oil industry, the conventional wisdom was clear, as the FT aptly noted: any conflict near key oil infrastructure would cause prices to soar, with traders rushing to secure barrels on the fear that supply could be cut off overnight.
Changing oil market reactions to Middle East tensions
In contrast, this June, despite missile attacks and US strikes on Iranian nuclear facilities, oil prices dropped instead of rising. Even after Iran responded by attacking the biggest US air base in Qatar, traders remained calm, showing no fear of disruptions in the Strait of Hormuz or a supply crisis (Reuters). As per the Financial Times podcast episode: ‘How oil traders called the Middle East war’, the base had been quietly emptied beforehand, confirmed through open-source satellite images and social media. Within minutes of the attack, oil prices dropped, triggering the steepest sell-off in three years.
The impact of the Russia-Ukraine energy crisis
This shift in trader psychology has roots in recent geopolitical tensions. When Russia-Ukraine war began in early 2022, it triggered a severe shock to global energy markets. Europe, heavily reliant on Russian oil and gas, scrambled to secure alternative suppliers, turning a price issue into a genuine supply crisis as countries rushed to secure energy for heating, industry and electricity generation. Natural gas prices in Europe soared to record highs, forcing some industries to restrict operations due to unaffordable energy costs. Europe increased LNG imports from the US, Qatar and others, while extending coal and nuclear power to prevent energy shortages (Brookings Institution). Azerbaijan also expanded its gas exports to Europe to help fill the gap left by reduced Russian flows.
Lessons learned and market adaptation
The Russia-Ukraine crisis exposed the risks of relying on a single energy supplier, pushing Europe to diversify and accelerate renewable investment. It also changed how oil traders judge geopolitical threats. Since that shock, which set a high bar for what qualifies as a true supply crisis, traders have used it as a benchmark for assessing other conflicts. Unless a new disruption matches that scale, markets are less likely to panic.
For instance, during the recent Middle East tensions, they weighed the likelihood of Iran attempting to block the Strait of Hormuz, a chokepoint for a quarter of the world’s oil shipments. Yet the focus of attacks on non-critical sites has reassured markets that oil flows will continue largely undisrupted, reducing fears of a severe supply disruption (Financial Times).
Shifting dynamics in global supply
Meanwhile, global oil production is growing faster than demand, creating an oversupplied market. The US shale revolution has made the United States the world’s largest oil producer, reducing dependence on Middle Eastern oil and providing a buffer for global supply, further muting market reactions to geopolitical shocks (NPR).
Recent conflicts, therefore, may trigger brief price spikes, but they often reverse quickly when supply remains unaffected. We are seeing a clear evolution in how markets respond to geopolitical tensions, with traders now focused less on headline risks coming out of places like the Middle East, Venezuela or Russia and more on actual supply impacts before driving price movements.
This shift has real consequences for those of us operating in the industry, shaping investment decisions, hedging strategies and even operational planning. It is a reminder that while geopolitics will always matter in oil, the market has matured and fear alone does not drive prices the way it once did.
