The oil price war
For an Iranian regime facing existential struggle, pushing crude up is key measure of success
Malcolm Moore in London, Najmeh Bozorgmehr in Tehran and Myles McCormick in Washington
A viral Iranian propaganda video, shot in the style of a Lego movie, offered a glimpse this week of how Tehran is claiming victory in one of the main fronts in its war with the US: the oil market.
Seven armed speedboats race towards tankers to close down shipping in the Strait of Hormuz.
Financiers weep and shake as oil prices surge.
Arabs look on in despair as crude sales collapse.
The video sequence and the real-life war, which has closed the strait and set tankers ablaze, reveal how soaring oil prices have become one of Iran’s most potent weapons in a conflict that has also involved great human cost.
“Energy markets are the battlefield in which the next phase of the conflict is unfolding,” says Geoffrey Pyatt, a former White House energy adviser.
“Iran is clearly playing to the markets now, in the calculus that this will put pressure on the Trump administration.”
For an Iranian regime for which survival means victory, pushing oil prices up is a key measure of success against a US president determined to keep them down.
The price is also influencing how the war is fought, prompting Donald Trump to declare the US effort “very complete” after oil neared a four-year high of $120 a barrel.
In one of the wildest weeks in oil market history, Iran’s ace in the hole has been its de facto blockade of the strait through which one-fifth of the world’s oil and liquefied gas normally flows.
At its narrowest point, the strait is less than 21 nautical miles wide, putting tankers perilously close to drones and missiles from Iran’s southern coastline.
Tehran now has near-total sway over the Gulf oil market, forcing neighbours such as Iraq to almost entirely stop production and trapping roughly 300mn barrels of oil and gas in the region, a number that rises by about 20mn every day.
As of Friday, prices remained about $100 a barrel despite Trump and his western allies announcing the biggest-ever release of emergency oil reserves.
With its new supreme leader, Ayatollah Mojtaba Khamenei, announcing his goal to keep the strait closed indefinitely, Iran has wrongfooted oil traders who had always presumed that US military might would keep the waterway open.
Iran has never blocked the strait before, despite its previous threats.
Its decision to do so this month, together with its attacks on neighbouring countries’ energy assets, is a mark of how existential a struggle the war has become for the country’s regime.
“The Strait of Hormuz has been Iran’s most valuable leverage, and it has used this advantage to the surprise of many, even within Iran itself,” says Hamid Hosseini of Iran’s oil exporters’ union, adding that Tehran’s own exports were continuing.
“If the conflict drags on, the world’s reserves will be depleted.”
In recent days, Tehran has at times appeared to be directly addressing oil traders in Geneva and New York, talking up the potential of oil to soar to as much as $200 a barrel.
The pressure on the Trump administration has mounted ahead of midterm elections in which his Republicans were already struggling with an “affordability” crunch now set to be stoked further by rising pump prices.
The White House, which had taken a triumphalist approach to a war in which it wiped out Iran’s top leadership on the first day, underwent a rapid mood shift on Sunday night as oil prices soared at the market opening.
After a weekend of reports that some of the world’s largest producers were being forced to cut production as the Gulf ran out of storage, oil prices raced higher in one of the biggest jumps on record, as the sheer magnitude of the energy crisis hit home.
“At about 6.05pm on Sunday the administration flipped from complacency to panic,” says a person with knowledge of the White House response.
“It was like the scales fell from their eyes and they realised they have a bigger problem than they thought.”
On Sunday night, US officials backed a meeting of G7 finance ministers for the following morning to discuss the emergency release of oil reserves, a move that the White House repeatedly insisted was not on the table the previous week.
An FT report of the shift helped cool the market, as did Trump’s remarks about the war nearing its end.
At times, the administration has seemed willing to consider almost any means of bringing down prices, temporarily removing sanctions from 100mn barrels of stranded Russian oil to ease their sale, and promising naval escorts and extra insurance for ships passing through the strait.
Members of Congress have floated ideas such as suspending federal taxes on petrol, relaxing environmental rules on fuel or temporarily banning US oil exports.
Pyatt, who worked on energy security for the Biden administration, says most such suggestions would only help at the margins.
In 2022, when oil prices surged on Russia’s invasion of Ukraine, the Biden administration was able to manage the situation with “traditional instruments” such as releasing emergency oil, Pyatt adds.
The dilemma now is that “this is ultimately a security issue and it is hard to solve a security issue with financial levers”.
As expectations fade for a swift conclusion to the fighting, the future price of oil is rising.
As of Friday afternoon, a barrel of Brent crude cost roughly $100 for May, nearly $98 for June and $93 for July.
Only by January next year does the market think oil will return to about $80 a barrel.
Oil traders have even speculated the US government may try to intervene in the derivatives markets to bring prices down.
“The administration manipulating the market is one of the key risks to our view of oil prices rising,” says one hedge fund manager drily.
Such a move would be a “biblical disaster” if investors lost confidence in markets to set the price of such crucial commodities, says Terry Duffy, the chief executive of CME, which runs the world’s largest oil futures exchange.
The market was also inflamed by an inaccurate post on X from Chris Wright, the US energy secretary, that claimed a naval escort had successfully accompanied a tanker through the strait.
Prices fell sharply, only to rebound when the post was deleted.
“It seems the US administration can wander into the densely populated airwaves of social media and drop cluster bombs,” says John Evans at oil broker PVM, adding that this is “the most market-savvy White House there has ever been”, and that it would know that automated trading software would instantly react to Wright’s post.
Wright has since said the navy was “simply not ready” to provide escorts.
Warships might only be able to provide limited protection to a tanker convoy if targeted by unmanned drones launched in the sea, and the US military could be unwilling to risk exposing its warships so close to enemy territory.
Ultimately, the only way for the US to bring down prices is to find a way to replace some of the losses, says Ernest Moniz, energy secretary during the Obama administration.
“If I am Chris Wright, I have to put out oil, I have to get it into the market,” he says.
“If you cannot replace 10mn barrels a day on the market pretty quickly, I don’t see how you tame the volatility we are seeing.”
He argued that the problem of controlling the market was compounded because Israel’s war aims diverge from those of its US ally, with Prime Minister Benjamin Netanyahu far less concerned about the price of oil.
“What is crystal clear is that the objectives of the United States and of Israel are not fully aligned,” Moniz adds.
Israel’s stance contrasts starkly with that of the Gulf countries dragged into the conflict.
Reeling from the damage to their petroleum-based economies, they have, like Iran, complained of the economic cost of the war as they seek to bring it to an end.
Both Qatar and Saudi Arabia have warned of the catastrophe that deepens with each passing day, as their oil and gasfields and processing plants become further damaged and take longer to return to normal.
Daniel Yergin, vice-chair of S&P Global and author of The Prize: The Epic Quest for Oil, Money, and Power, says that, because of their oil wealth, Gulf countries have more influence than they once did but also more to lose.
“They are also big players now financially and in the global economy in a way that was not true even a decade ago,” he says.
They are also acutely aware that if they are unable to supply the market for a prolonged period, it will open political space for more Russian energy to return to global markets.
A home heating oil delivery truck fills up in Danvers, Massachusetts. Rising prices could threaten Republican hopes in the midterm elections this year © Brian Snyder/ReutersGulf countries tried to warn the US of the chaos it would unleash by seeking regime change in Tehran before the fighting began, according to several people familiar with the matter.
“I don’t know how the US wasn’t expecting it.
They were warned.
They chose to disregard the warnings and here we are,” says Helima Croft, a former CIA official who is now an analyst at RBC Capital Markets.
She adds that Gulf countries were “furious that this happened, they are furious with the Iranians and they are furious that the hornets’ nest was kicked.”
But while there were US efforts to model the fallout, officials believed that the campaign against Iran would be short, perhaps lasting only a week, and that any jump in prices would simply be a “blip”, as Wright told the media ahead of the strikes.
The White House has rejected the idea that it had been caught off guard.
“No one was panicked then and no one is panicked now — this is a fake narrative that the media is peddling to sensationalise their stories,” says White House spokesperson Taylor Rogers.
“The president and his entire energy team have had a game plan to stabilise the energy market since before the operation began.”
Republicans have rallied around the White House, insisting it was braced for the fallout.
“It is categorically false that they did not plan for Iran closing the Strait of Hormuz,” said Montana Senator Tim Sheehy on Friday.
“Lawmakers and national security officials have known for years that this was Iran’s plan once their backs were against the wall.”
But traders have been confused by the president’s mixed messaging on how long the conflict will continue, and how much he wants to bring prices down.
“It is more important to me Iran is stopped than the high oil price,” the president posted on his Truth Social network on Thursday, noting that the US was the world’s largest crude producer.
“When oil prices go up, we make a lot of money.”
The market is acutely aware that a return to normality could be months or even years away.
“The industry is in shock.
They know how difficult it will be to repair and bring fields back and restore equipment,” says Yergin.
“Energy supply systems don’t turn on a dime.
It takes time and investment to bring on new capacity of any kind.”
Nor is the decision to end the war just in the hands of the US and Israel.
Roxane Farmanfarmaian at the UK’s Royal United Services Institute, a defence think-tank, predicts that the Iranians will continue to keep the strait closed and raise oil and gas prices for a significant period.
“Iran wants to be sure that eight months or 10 months down the line, once a ceasefire has been established, that the Israelis and the Americans don’t come back.
They don’t want a third war.
So they’re going to push this to the point where the Americans cannot come back,” she says.
Further escalation is possible.
Yemen’s Houthis, one of Iran’s proxy militaries, have yet to enter the conflict and disrupt shipping in the Red Sea, through which Saudi Arabia is trying to redirect some 70 per cent of its exports, or target the kingdom’s pipelines.
Inside Iran, the regime is aware that the release of emergency reserves may cushion the pain for the global economy a few more weeks but suggests that it may even emerge strengthened from the conflict
“After the war, Iran will maintain control of the strait and could demand fees for passage,” says Hosseini of the Iranian oil exporters’ union.
“No country will be able to challenge this.
Iran has found a point of leverage that the US cannot effectively counter.”
Additional reporting by James Politi and Jamie Smyth
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