By Jinjoo Lee

The oil market has gotten used to quickly recovering from geopolitical threats. Could this time be different?

Brent crude futures have jumped 8% to around $78 a barrel after the Iran conflict began over the weekend. There are two scenarios that could cause a more severe and lasting impact on pump prices. One is a prolonged disruption to the flow of oil tankers through the Strait of Hormuz, through which about 20 million barrels a day of oil -- or a fifth of global oil production -- transits. Second is serious damage to the region's oil production or infrastructure, especially the kind that would disrupt spare capacity in Saudi Arabia and the United Arab Emirates.

The worst-case scenario is one where Iran does serious damage to neighboring countries' oil facilities, especially the export terminals that are difficult to repair and are within striking distance of Iran's weapons systems, according to Clayton Seigle, senior fellow at the Center for Strategic and International Studies. He estimates that this kind of damage could send oil prices higher than $130 a barrel, which was the peak after Russia's invasion of Ukraine.

Markets are used to quickly getting over geopolitical threats because the worst-case scenarios haven't played out in recent history. The Strait of Hormuz hasn't been disrupted in a serious way since the 1980s. Attacks on the region's oil infrastructure -- including two separate hits on Saudi Arabia's oil infrastructure in 2019 -- have failed to do much damage. "We've had seven years of 'boy who cried wolf'" since Iran-allied Houthis attacked Abqaiq, a key Saudi oil-processing facility, said Bob McNally, president of Rapidan Energy Group.

But the current crisis is on another level: The U.S. is no longer just playing hardball with Iran's leaders; it is pushing for regime change. "Iran has no reason to hold back its most capable and powerful weapons, which includes its ability to disrupt the oil and gas markets," according to Seigle. Iran attacked three commercial vessels around the Strait of Hormuz on Sunday. It also attacked Saudi Arabia's biggest oil refinery overnight.

While Iran may not be able to physically close off the Strait of Hormuz, they do have the ability to disrupt oil's passage -- through strikes, harassment or by placing mines, according to a note from ClearView Energy Partners. "All you have to do is make it too risky for commercial vessels and insurers to agree to send ships through the Strait," according to Rapidan's McNally.

If the Strait is disrupted, there isn't nearly enough pipeline capacity to reroute the oil. The International Energy Agency estimates that only about 4.2 million barrels a day of regional pipeline capacity is available. And if oil supply is hit, there isn't much cushion left in the system. The Organization of the Petroleum Exporting Countries and its allies have been ramping up production, leaving them with less spare capacity than they did before Russia attacked Ukraine in 2022. On Sunday, they agreed to hike production by 206,000 barrels a day starting in April. But actual production is likely to undershoot because of the "lack of actual production capabilities," according to a note from RBC Capital Markets. In any case, spare capacity will only help if Hormuz remains open for the spare capacity holders -- Saudi Arabia and the U.A.E. -- to send out their oil.

Can China act as a buffer? China has been loading up on cheap, sanctioned oil, putting some of it away in storage. In a report, analysts at Morgan Stanley said China could slow down on its purchases if oil prices spike, providing a cushion. But the opposite scenario is hard to ignore: An escalating conflict in the Middle East could spur even more hoarding behavior by Beijing. One potential cushion is sanctioned oil on water, although this might depend on China and other countries' willingness to cross Trump. Goldman Sachs estimates that there are some 375 million barrels sitting on water.

And while the U.S. is the biggest oil producer in the world, shale isn't considered spare capacity, which by EIA's definition is production that can be brought online within 30 days and sustained for at least 90 days. It typically takes a few quarters to raise U.S. production significantly, according to a report from Goldman Sachs.

Strategic stockpiles can help, but this cushion is also limited. There is only so much oil that can come out of those reserves in a given day because of pipeline constraints. The U.S. Strategic Petroleum Reserve may be able to provide 1.4 million to 2.1 million barrels a day, and other members of the IEA might be able to draw down about 5.2 million barrels a day of crude, according to ClearView. That compares with 20 million barrels a day that normally pass through the Strait of Hormuz. The U.S. reserve is roughly equivalent to 20 days of domestic consumption.

Oil can still act as a deterrent to both sides. Trump will want to avoid high gas prices before the midterm elections and Iran won't want to lose its oil revenue. However, the escalation over this weekend has already shown that both sides might be willing to tolerate more risk than the markets think.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

(END) Dow Jones Newswires

March 02, 2026 10:54 ET (15:54 GMT)

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