Oil Price Outlook Update: How a Potential Iran War Could Reshape Energy Markets

According to the Wall Street Journal, President Trump is reportedly weighing a "bloody nose" style limited military strike against Iranian military and government sites to coerce Tehran into a nuclear deal. This calibrated escalation is designed to pressure the regime into compliance within a 10-to-14-day window, with the caveat that any failure to yield would trigger a broader campaign aimed at regime change.

While Washington continues to deploy carrier groups and military assets to the region, regional officials warn that even a limited strike would likely collapse current negotiations and provoke a maximum force retaliation from Iran.

The risk of energy supply disruption is what currently drives markets, and this is the primary factor we must assess at each stage.

Looking ahead, the first scenario is what Donald Trump wants to see: a quick war that achieves its targets in a matter of weeks or forces Iran to accept US-Israeli conditions with minimal side costs to the region or the world. In this case, oil prices may retreat quickly from their highs, similar to the market reaction seen during the twelve-day war.

The second scenario involves cutting off energy exports from Iran completely by targeting its oil facilities or through other means of force majeure. This might result in short-term, limited rises in oil prices that could be reversed once other oil exporters bridge supply gaps. Since the market is currently oversupplied, this price correction might be relatively fast.

The third, worst-case scenario involves targeting oil and gas supplies from the Middle East, specifically through the Strait of Hormuz. Iran could take such a step to pressure US allies to stop a war that would impose a huge cost on global economies and potentially spark energy-driven inflation again. Iran may also target other regional oil facilities to achieve this purpose.

This could result in a massive spike in oil prices, and the duration of the spike will depend on how long the energy supply chain remains disrupted. If Iran blocks the Strait and survives the initial waves of air strikes, that blockage might persist for weeks until a diplomatic resolution is reached. If Iran’s defenses do not survive, the disruption might last only a very short time. The absolute worst outcome here involves a massive oil spill (or even radioactive contamination) in the sea that could disrupt navigation for weeks or months.

A more extreme scenario can be drawn from misjudgments or unexpected losses, such as the disabling of a US aircraft carrier(s). This would be a humiliating blow to the United States and Trump personally. In such a high-stakes situation, nuclear escalation could become a real possibility.