Paisie: How Spiraling Iran Conflict Could Jolt Oil Prices

Editor's note: This article was updated on June 16 to include an addendum pertaining to the evolving conflict between Israel and Iran.

In June, we highlighted concerns about the higher-than-expected supply increases from OPEC+ and the resulting negative pressure on oil prices.

In early May, the price of Brent crude oil fell to $60.23/bbl. If OPEC+ moves forward with its accelerated plan, the unwinding voluntary cuts of 2.2 MMbbl/d will be completed in November of this year, instead of September 2026, which was agreed to last December.

OPEC+ is moving forward with the supply increases, in part, to push the chronic overproducers with OPEC+ (including Kazakhstan, Iraq and Russia) to comply with previously agreed quotas and reduce supply further to account for early oversupply. Additionally, it is our view that OPEC+ wants to see a material drop in U.S. oil production before OPEC+ pulls back from the elevated monthly supply increases.

Our analysis uncovers signs that U.S. shale oil producers are reducing production activity.

U.S. shale oil production increased throughout 2024, primarily fueled by continued growth in the Permian Basin. The number of completed wells in the Permian Basin, however, peaked in third-quarter 2024 at 1,501 wells before declining to 1,329 wells by first-quarter 2025.

Production in the Permian increased steadily from 5.42 MMbbl/d in first-quarter 2024 to a peak of 5.72 MMbbl/d by the fourth quarter, before slightly easing to 5.68 MMbbl/d in early 2025. Overall, total U.S. tight oil production increased from 8.03 MMbbl/d to a peak of 8.46 MMbbl/d in the fourth quarter, followed by a minor decline to 8.36 MMbbl/d in first-quarter 2025.

Growth of 1 MMbbl/d

Since early May, when oil prices bottomed out, external factors and associated headlines have given them a boost.

First, oil prices got a boost from the drone attack launched by Ukraine on Russian interior air bases. Oil prices got another boost from easing trade tensions between the U.S. and China, with Treasury Secretary Scott Bessent and other U.S. officials meeting in London in early June with their Chinese counterparts, which appears to have reset the trade negotiations between the two countries and resulted in an agreed framework.

Israel’s attacks on Iran on June 13 appear to be focused on Iran’s nuclear program but constitute a high-profile external development that affects oil prices. After the initial attacks, oil prices spiked, with the price of Brent crude reaching $78.45/bbl before falling back to around $75.

So, where will oil prices go?

While there has been plenty of news associated with external factors, there has been limited impact on supply/demand fundamentals. The International Energy Agency recently increased its demand growth forecast for 2025 slightly to 740,000 bbl/d. Based on our analysis of oil demand with respect to each demand segment at the country level, and with consideration of the shifts in the vehicle fleet and the role of alternative fuels, we have adjusted our oil demand growth for 2025 to 1 MMbbl/d.

Regardless of the result of the tariff talks, there will be limited short-term impact on oil demand—but clarity around tariffs will help mitigate some of the downside risks. From a supply perspective, if OPEC+ continues with its supply increases, then supply will outpace demand in the second half of the year by more than 1 MMbbl/d—unless there are cuts from other producers, including the U.S.

Higher prices resulting from geopolitical tensions, however, reduce some of the pressure on U.S. shale producers and the overproducers within OPEC+ to reduce production. Sanctions could also result in lower oil production, but at this point sanctions are unlikely to have much of an additional impact on Russia or Venezuela beyond the current impact.

With the recent geopolitical developments, the U.S. and allies may have greater interest in imposing tighter sanctions on Iran. The effectiveness of the sanctions, however, remain in question because oil trade between Iran and China is executed outside of the U.S. dollar system and western shipping.

Risk of continued attacks

There is also the potential for a reduction in Iranian oil supply stemming from the military attacks on Iran. So far, however, the focus of the attacks has been on Iran’s nuclear facilities; Iran’s energy infrastructure has been left alone.

The possibility exists that the attacks may continue, and out of desperation, Iran attempts to stop oil traffic through the Strait of Hormuz, through which some 30% of global waterborne oil flows. It is highly unlikely that Iran will move to close the Strait of Hormuz since this would affect the movement of Iranian oil, but actions similar to those taken by the Houthis to disrupt flow in the Red Sea are more likely.

Another possibility is that Israel keeps attacking Iran in an attempt to initiate regime change, which is more likely if Iran moves forward with counterattacks on Israel. Iran, however, may not have the remaining capability to launch any meaningful attacks.

Regardless, Iran may decide to forego any such attacks, realizing that such attacks would only result in the excuse for more attacks in response, and instead adopt the strategy of reopening nuclear negotiation talks with the U.S. We think this is the most likely outcome because it appears to be the only valid strategy for Iran without risking even more attacks, and it also aligns with the wishes of President Donald Trump.

Consequently, our reference case is that during the rest of the second and third quarters, the price of Brent crude will be in the range of $75/bbl to $80/bbl and the price of WTI will be between $70 and $75. That said, given the recent external developments, the range of the upside and downside cases have widened with the potential for greater volatility.

Addendum (June 16, 2025)

Since the original article was published, the conflict has continued to evolve with Iran and Israel exchanging attacks. Oil prices, however, have pulled back after the initial spike with the market discounting the geopolitical risks with the flow of oil currently not being disrupted.

Looking forward, answers to the following key questions will shape the future course of the conflict—and the impact on the oil markets.

• Will there be a negotiated settlement in the near term?

There are reports that Iran has expressed openness to restarting negotiations with the U.S. to arrive at a nuclear deal. President Trump has also expressed his preference for a negotiated settlement. The main stumbling block, however, still exists—the U.S. has stated that Iran cannot enrich uranium at any level. Iran has previously stated that the banning of uranium enrichment is not acceptable. With Israel having gained the military advantage, including claims of air superiority, Iran may be ready to be more flexible in the negotiations in pursuit of a ceasefire. At this point, however, the possibility of a ceasefire and resumption of negotiations seems to be not in the immediate offing.

• How far are the two parties willing to go?

The two parties have already moved to initiate attacks on non-military assets, including energy-related assets. Iran hit the Haifa oil refinery with missiles and while the refinery still appears to be operating some process units have been shut down. Israel has attacked some Iranian oil depots and the South Par gas field, which has resulted in gas production being reduced. Iran’s oil production and export facilities, however, have not been attacked. Such attacks would be a major escalation. Additionally, Israel has been indicating that it will put further military pressure on Iran in an attempt to initiate regime change. As we previously pointed out in the original article, in response to such escalation, Iran may attempt to stop oil traffic through the Strait of Hormuz, through which some 30% of global waterborne oil flows. It is highly unlikely that Iran will move to close the Strait of Hormuz since this would affect the movement of Iranian oil. Actions similar to those taken by the Houthis to disrupt flow in the Red Sea is more likely—unless Israel disrupts Iran’s oil production and exports—then the probability of Iran taking more drastic action with respect to the Strait of Hormuz ramps up.

• Will other countries get involved in the conflict?

Another development to watch for is if any of Iran’s allies—notably Russia and China—step up their support for Iran. Russia has a 20-year strategic partnership agreement that pertains to defense and economic development that was signed in January of this year. The defense portion includes cooperation against shared threats—but not a mutual defense clause. China is Iran’s largest trading partner and purchases more than 90% of Iran’s oil exports. China has also invested some $400 billion in energy, transport and industrial sectors, including the Yadavaran oil field. Besides Russia and China, North Korea cooperates militarily with Iran, including technology transfers pertaining to missiles and drones. Pakistan has condemned Israel attacks on Iran and voiced solidarity with Iran. The longer the conflict goes on the greater the risk of the other countries getting involved—much less so directly—but indirectly, including the supply of military equipment and weapons. Additionally, it will be difficult for Israel to destroy Iran’s nuclear program without the help of the U.S.

With consideration of each of these questions—we think as of today (June 16, 2025) that the conflict will continue and that the attacks will intensify—and a ceasefire is not imminent. However, we think a negotiated settlement without major disruption to the flow of oil is still the most likely outcome. The supporting rationale is that the U.S. will not become involved in the offensive part of the conflict (and not push for regime change), but will raise the threat of doing so, which will discourage Iran taking reckless action. Furthermore, we do not think that Iran will be provided with sufficient support from its allies to be successful in the military conflict. Taken together, the resulting dynamic will leave room for reinitiation of negotiations and a new nuclear deal.