U.S. Considers Responses to Iran Instability Amid Global Oil Supply Concerns

The United States is actively evaluating potential responses to Iran's domestic instability and widespread protests. This consideration has intensified concerns among energy analysts regarding possible disruptions to global oil supplies, particularly through the Strait of Hormuz, a vital waterway for international energy shipments.

U.S. Stance and Iranian Domestic Context

U.S. President Donald Trump has indicated his administration is exploring options against Iran, following reports that the Iranian government's crackdown on protesters crossed a previously established threshold. President Trump later clarified that the U.S. would continue to monitor the situation before making a decision, while also noting reports of an easing crackdown by the Iranian government.

Through back channels, the Trump administration has communicated its openness to negotiate with Tehran. Recent reports of a U.S. aircraft carrier deployment to the Middle East have been interpreted by some analysts as increasing speculation about potential military action.

Iran has experienced widespread protests since late December, leading some to perceive its government as being in a weakened state. The social situation in Iran, including poorly maintained oil infrastructure contributing to budget strain and fueling protests, mirrors some aspects observed in Venezuela. A significant concern for the Iranian government is the potential for oil sector workers to join protest movements, a factor that historically contributed to political change in 1978. The impact of current unrest on the oil-rich Khuzestan province and oil exports remains unconfirmed.

Iran's Role in Global Energy Markets

Iran holds the world's third-largest proven oil reserves, after Venezuela and Saudi Arabia, estimated at 209 billion barrels. Its daily oil production has been reported between 3.2 million to 4.7 million barrels per day, contributing approximately 4% of global crude output and ranking it as the world's sixth-largest producer. Within OPEC, Iran is the third-largest producer. Historically, Iran's daily production reached 6.5 million barrels per day in the mid-1970s.

Despite international sanctions, which compel Iran to sell oil at a discount and limit necessary investments, its oil sector has demonstrated resilience, stabilizing around 4 million barrels per day after falling to 2 million barrels per day in the 1980s. However, Iranian refineries struggle to produce petroleum products meeting Western quality expectations, partly due to past attacks on the country's midstream sector.

Sanctions restrict Iran's customer base, leading the country to utilize a "shadow fleet" of oil tankers to evade Western sanctions. This fleet, operated in part by the National Iranian Tanker Company, stores production and facilitates transfers of sanctioned oil onto non-Iranian-flagged vessels at sea, with many tankers anchored in Southeast Asia. China is Iran's primary oil customer, purchasing an estimated 97% of its exports in 2024.

Energy experts indicate that a destabilized situation in Iran would significantly affect global oil and financial markets, a contrast to the less pronounced reaction observed following events in Venezuela's oil industry.

Iran produces approximately four times the oil volume of Venezuela and exports around 2 million barrels per day, compared to Venezuela's 350,000 barrels per day. The Middle East accounts for approximately half of the world's oil reserves and one-third of global oil production, making political developments in Iran highly influential.

The Strait of Hormuz: A Critical Chokepoint

The Strait of Hormuz is a narrow waterway connecting the Persian Gulf and the Arabian Sea. Approximately one-fifth to one-third of global oil output, or about 13 million to 20 million barrels per day of crude oil, transited through it in 2025. It also facilitates roughly 20% of global liquefied natural gas (LNG) production. Its strategic importance makes it a focal point for concerns about potential disruptions.

Industry experts have warned that a military confrontation could lead Iran to disrupt the Strait of Hormuz.

Saul Kavonic, head of energy research at MST Marquee, stated that a disruption could trigger a global oil and gas crisis, particularly if Iran's government perceives its power and survival to be at stake. Iran's Supreme Leader has warned that any U.S. attack would initiate a "regional war."

However, most analysts consider catastrophic outcomes, such as a full closure of the Strait, to be low-probability events. Muyu Xu, a senior crude analyst at Kpler, suggested that Iran may lack the full capability to close the Strait, partly due to the U.S. Navy's presence in the area. Even a temporary disruption, such as harassing tankers, would likely have limited immediate physical impact on supply. Bob McNally, president of Rapidan Energy Group, however, indicated that assumptions about the U.S. Navy's ability to quickly clear threats in the Strait might be incorrect, citing past difficulties with Houthi rebels.

Oil Market Response and Projections

The prospect of disruptions in Iran has influenced oil prices. Crude prices initially rose following threats of a U.S. attack, pushing Brent crude and West Texas Intermediate (WTI) prices to multi-month highs, but later retreated when an attack was suggested to not be imminent or as the perceived likelihood of military action decreased. Brent crude futures increased by 5% in a recent week and 14% year-to-date, trading around $63 a barrel, with WTI at $59 per barrel.

Bob McNally, founder of Rapidan Energy Group, cited probabilities between 70% and 75% for selective U.S. strikes on Iran in the coming days to weeks.

Analysts project that oil prices could surge by $10 to $20 per barrel in an extreme escalation scenario where tankers cannot pass or energy infrastructure is damaged. Some investment bank estimates suggest prices could reach $120 a barrel if a blockade of the Strait were to occur.

Kavonic anticipates an immediate oil price spike following any U.S. attack, which would soften if the disruption appeared temporary. McNally suggests that this potential situation could lead to a sustained disruption in energy flows, unlike previous U.S. actions that caused only temporary or minor price changes due to avoiding oil infrastructure. A blockade of the Strait would also affect global LNG production, potentially leading to higher gas prices in Europe.

Broader Market Fundamentals and Geopolitical Factors

The global oil market is currently characterized by an oversupply. Kpler estimated an excess of roughly 2.5 million barrels per day in January and over 3 million barrels per day in February and March. Goldman Sachs revised its 2026 price predictions downwards, forecasting a 2.3 million barrels per day surplus by 2026. This projection suggests that lower prices may be necessary to balance the market.

Despite OPEC's current pause on unwinding production cuts, forecasters like the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) continue to predict growth in global oil supply. U.S. oil production growth is decelerating, and the EIA predicts it will flatten this year and may experience a slight decline extending into 2027.

Other geopolitical developments also influence crude prices:

• The United States began selling Venezuelan crude, generating $500 million from the first batch, contributing to a bearish market sentiment.
• Drone strikes on tankers in the Black Sea and attacks on the Caspian Pipeline Consortium by Ukrainian forces reportedly decreased Kazakhstan's oil output by 35% in early January. Kazakhstan has requested international assistance to secure oil transport routes.
• The European Union is reportedly planning to lower its price cap for Russian oil to $44.10 per barrel, effective next month, to reduce Russia's oil revenues.

Approximately 1.3 billion barrels of crude oil were recorded on water in December, the highest level since 2020. However, about one-quarter of this volume originates from sanctioned producers like Russia, Iran, and Venezuela, which typically takes longer to find buyers. Recently released Chinese import data showed record oil imports in December and for the year 2025. Market observers note that predicting oil prices remains challenging due to conflicting narratives and various global factors.

Potential Outcomes of Political Change in Iran

If Iran were to experience a change in government, the oil industry would likely remain central to its economy, currently accounting for 10% to 15% of its gross domestic product and half of the government's revenue. Iran's oil infrastructure is considered to be in fair condition, offering a foundation for future development, unlike Venezuela's deteriorated assets.

In the short term, a change in regime could lead to higher oil prices due to political transition uncertainties. However, a new government could potentially stabilize and reduce oil prices in the long term, particularly if it introduces greater transparency to the oil sector. The lifting of international sanctions would likely depend on the emergence of a new government favorable to Western nations. U.S. oil companies' investment in Iran would likely require political stability and security assurances, though current lower crude prices may limit the immediate appeal for new investment opportunities in regions with perceived higher risk.