Oil Prices Fall?
The Middle Eastern conflict between Israel and Iran has escalated after the U.S decided to step in. The U.S launched an attack on 3 nuclear development sites across Iran. These attacks have been said to set back their nuclear program by roughly 3-6 months. The strikes sealed off entrances but failed to damage underground facilities. Iran retaliated by launching an attack on a U.S military base in Qatar.
As one could expect, this news could be concerning for oil prices. Right after the announcement, prices shot up to roughly $80 per barrel. Iran produces roughly 4 million barrels a day of total petroleum and other liquids, with 2.9 million of it being crude oil. Globally, it is ranked the 9th largest producer and 4th largest in oil reserves. Shockingly, roughly 16 hours later, after Iranian attacks, prices plummeted. As of 5/25/25, they are floating around $65 a barrel. This low is comparable to that of prices 3 years ago.
Oil prices are primarily driven by supply and demand. The OPEC, Organization of the Petroleum Exporting Countries, historically has controlled the supply by managing production quotas. Despite this economic growth, weather and geopolitical events can play a major role in its volatility.
Despite heightened tensions, oil prices fell sharply due to a combination of market expectations and broader supply dynamics. This retaliation was seen as symbolic rather than escalatory. President Trump announced that Israel and Iran had agreed to a ceasefire, calling it the “Twelve-Day War." He also thanked Iran for an early notice signaling that the U.S. didn’t have the intention of further retaliation. This calmed the market and reinforced the idea that the worst has passed.
Unlike the 2022 invasion of Ukraine, which drove prices up to $120, markets have become unresponsive to much of the Middle Eastern conflict. Attacks were also not aimed at oil or energy infrastructure, and the current supply exceeds demand. The U.S. is now the world’s largest oil producer, offering some cushion.
Despite this, Iran can hold some leverage through the Strait of Hormuz. This passage sees over 20% of the world’s oil. A blockade could easily drive prices over $100, yet this would harm allies such as Iraq and China.
While oil prices have dropped sharply, the situation is still fragile, with the market betting on de-escalation. Any immediate threat to the infrastructure of shipping lanes could reverse this sentiment. High inventories and symbolic military exchanges have outweighed this initial panic.