Global oil markets stand completely altered and transformed. Warning bells are ringing all around. Ten days are long enough to change everything, as far as the oil markets are concerned.

Until a few days before the commencement of the Iran-Israel war on June 13, oil markets were on a slippery slope. With global crude demand growth at its slowest since the pandemic, analysts from S&P Global and others had predicted that crude oil prices might drop below $50 per barrel. On June 11, Brent crude was trading at $66.82 a barrel, whereas West Texas Intermediate (WTI) prices were hovering around $65 a barrel.

This was despite a somewhat positive mood in the market due to the reported progress on resolving tariff and trade conflicts between the US and China and the possibility of easing some export restrictions between the two global trade giants.

The June 13 Israeli attack on Iran changed the global energy trajectory altogether. By the end of the day on June 13, WTI futures and international benchmark Brent crude settled at $72.98 and $74.23 per barrel, respectively. This was despite the markets paring some gains, which saw prices spiking by more than 13pc at one point.

The war between Iran and Israel continues and has entered its second week. Iran has not been annihilated yet, as some in Israel may have anticipated. Oil markets are on edge, and for understandable reasons.

‘If military operations between Iran and Israel continue, the global market may lose 5m bpd from Iraq and the Gulf states’

By the end of the day, last Friday, June 20, Brent crude futures settled down $1.84, or 2.33pc, to $77.01 a barrel. US WTI crude for July was also down 21 cents, or 0.28pc, at $74.93. The more liquid August contract settled at $73.84.

Yet, to be fair, the impact of the war has not been profound. Despite all the odds, the reaction of the crude market seems restrained. But all this could change at any flip of events. Much depends on how the war unfolds in the days to come. Various permutations and combinations are up in the air.

Iran is fighting the war with limited resources. It lacks advanced and modern military machines, with an almost non-existent air force to counter Israel. Tel Aviv, on the other hand, is equipped with modern equipment and aircraft. The Western world is aligned against Tehran. The neutrality of Iran’s immediate neighbours or any possible support from them remains a big question mark. The recent meeting between the Pakistani army chief and President Trump has raised serious questions. Was it another moment of: are you with us or them? Who knows?

Pushed to the wall, Iran has few options. In an extreme situation, it probably can block the flow of crude oil vessels passing through the Straits of Hormuz as a last resort. Some 20 per cent of the world’s crude passes through the straits, and Iran has the potential to disrupt, at least in the short term, shipments to the rest of the world. But it would carry serious consequences for Iran, too. Some say it could be suicide on Tehran’s part. The United States will not permit it and may use its military might to ensure the straits remain open.

This could also result in a further widening of the war theatre. Regional Arab states could be sucked into the war. The entire oil-rich region could be up in flames. Being the next-door neighbour of Iran and under increasing pressure from the United States to support the war against Tehran, Pakistan cannot escape feeling the heat.

These are all extreme projections with major fallouts. In the event of any such occurrence, the crude market will respond violently. Financial powerhouses are already modelling worst-case scenarios into their oil price projections.

Citibank analysts say Brent crude could remain 15–20pc above pre-conflict levels — around $75 to $78 per barrel — if the Iran-Israel conflict disrupts 1.1 million barrels per day (bpd) of Iranian oil exports. Iran, the Organisation of Petroleum Exporting Countries’ third-largest producer, pumps 3.3m bpd. Citi estimates that a 3m bpd disruption over several months could lift prices to $90/barrel.

JP Morgan has warned that if the conflict widened to close the Strait of Hormuz, oil could surge to $120-130. Goldman Sachs sees a $10/barrel premium already incorporated in the crude market prices. Barclays sees $85 oil if Iranian exports are halved and above $100 in a worst-case regional war.

Iraq’s Foreign Minister, Fuad Hussein, has issued a more dire warning: “The Strait of Hormuz might be closed due to the Israel-Iran confrontation, and the world markets could lose millions of barrels of oil per day in supplies. This could result in a price increase of between US$200 and US$300 per barrel.”

While speaking to German Foreign Minister Johann Wadephul over the phone, at the commencement of the war, Mr Hussein added, “If military operations between Iran and Israel continue, the global market will lose approximately 5m barrels per day produced by Iraq and the Gulf states.”

Such a supply shock would worsen inflation, strain economies, and hurt both exporters and importers, including vulnerable countries like Iraq.

Major Asian oil consumers, India and Pakistan included, are reportedly weighing their options in case the Israel-Iran conflict disrupts oil supplies through key chokepoints. Oilprice.com is reporting that Indian refiners are considering supplies from West African producers such as Guyana and other alternative energy sources, including Russia.

Meanwhile, it is reported that Pakistan is also exploring pipeline oil supplies from the United Arab Emirates and Saudi Arabia. But this remains a long shot. Oilprice.com has reported that Islamabad is negotiating with international oil suppliers, seeking alternative supplies.

Furthermore, to be prepared for any eventuality, Pakistan is trying to shore up its crude storage capacity by potentially storing oil in abandoned power plants, whose furnace oil storage is estimated to have the capacity to hold up to 1m tonnes of oil.

A governmental committee, established to monitor the evolving situation and assess its impact on the country’s oil market, is considering a proposal to purchase these storage units, which the power sector planned to dispose of by selling as scrap.

All bets are on. Interesting times are back. Wars and geopolitics are once again dictating the energy markets. Energy and geopolitics can hardly stay away from each other and for long.

Published in Dawn, The Business and Finance Weekly, June 23rd, 2025