Iran Risks, Oil Volatility, and the Case for Diplomacy

Key takeaways:

• The standoff is driven by a stark red line from Washington on enrichment and an equally firm refusal from Tehran to give enrichment up entirely, leaving politics as the main source of uncertainty.

• A face saving compromise remains possible if limited, civilian use enrichment is separated from any pathway to weapons grade material, but domestic and regional constraints make that outcome hard to land.

• From the US perspective, walking away without action is politically difficult, so a limited strike is discussed as a signalling move, even though it increases escalation risk.

• The reaction inside Iran is highly uncertain, since public unrest could grow but security forces have shown they can respond with force, making outcomes unpredictable.

• Oil prices reflect this hot and cold diplomacy, yet the underlying market remains oversupplied, which helps keep prices relatively moderate despite elevated geopolitical risk.

• Volatility is amplified by three structural factors, sanctions driven flows into China, oil stored on the water via shadow shipping, and a shrinking spare capacity buffer that can make markets more fragile later in the year.