Oil prices are cautious as U.S-Iran atacks escalate

Key takeaways:

• The escalation has added a geopolitical risk premium to oil prices and, to a lesser extent, gas prices. However, current market behaviour reflects concern rather than panic.

• Further casualties could lead to additional retaliation, but they do not necessarily mean that negotiations will be abandoned. Both sides continue to signal that a diplomatic route remains possible.

• The Strait of Hormuz remains Iran’s main source of leverage over global energy markets. Saudi Arabia and the UAE have developed alternative export routes, but these routes cannot fully replace the volumes transported through the Strait.

• Other regional producers should accelerate investment in alternative infrastructure. Iraq, for example, is exploring the revival of routes through Türkiye and Syria, including the Kirkuk Baniyas pipeline.

• Greater infrastructure connectivity and cooperation between Middle Eastern producers could diversify export options and reduce the region’s dependence on a single maritime route.

• Proposals to impose a toll on vessels passing through the Strait are unlikely to offer a lasting solution. Such an arrangement would raise serious questions under international maritime law and could set a challenging precedent for other global trade routes.

• Gulf countries will have an important role in determining any future settlement. They have been directly affected by the conflict and retain significant influence over both the United States and Iran.