There are several layers of uncertainty when it comes to the ongoing talks between the US and Iran. The first is whether the two parties will be able to come to a nuclear deal. The US wants Iran to stop enriching uranium, as well as handover its enriched uranium, limit its ballistic missile programme and stop supporting proxies in the region. Iran claims its nuclear programme is for civilian purposes and wants to be able to continue with limited enrichment of uranium. There have been conflicting reports that the US may be willing to accept small levels of enrichment. In addition, if we are to get a deal, will this include an easing of US sanctions on Iran? If so, this would clearly be a bearish development for the market, with prospects for Iran to increase supply by as much as 500k b/d. While obviously opening Iranian crude to more markets than just China.
Assuming no deal, given the buildup of US military assets in the region, it is likely that we see the US taking some military action against Iran. President Trump already stated a maximum of 10-15 days to come to a deal, which would leave a deadline of early March. However, what is unclear is the extent of action the US is willing to take, and also the degree to which Iran retaliates. Brief and targeted strikes on nuclear/military sites and limited retaliation from Iran, as seen in June 2025, would likely see oil prices briefly spiking towards $80/bbl, but in the absence of oil supply disruptions, we suspect it would be a short-lived rally.
The bigger concern for the market would be more extensive strikes from the US, which are not limited to nuclear sites, potentially putting the Iranian oil supply at risk. This would suggest that the US is not just targeting an end to Iran’s nuclear programme but potentially targeting regime change. This would mean far more aggressive retaliation from Iran, which not only leaves Iranian supply at risk, but broader flows from the Persian Gulf, which pass through the Strait of Hormuz (SoH).
After accounting for potential diversions via pipeline, this still leaves in the region of 9m b/d of crude oil and 6m b/d of refined products at risk. Successfully blocking the SoH would leave significant upside to the market, potentially with Brent hitting $140/bbl, with supply losses unable to be offset. Higher prices would be needed to ensure demand destruction. However, a full and prolonged blockage of the strait would likely be unsuccessful, with any attempts to do so leading to a rapid response. Partial disruptions, which could include seizing or attacking tankers, would likely mean Brent spikes towards $100/bbl initially but settles in a largely $80-90/bbl range.