A sudden rise in crude prices driven by a renewed fear of a military confrontation between the US and Iran has caught out bearish traders, forcing many to rethink their near-term outlook for the oil market after a period of falling prices.
The price of Brent crude surged 4.3 per cent on Wednesday to close at just under $70 a barrel, the biggest gain since October, as the Trump administration told dependants of American military personnel to leave the Middle East amid rising tensions with Iran over the Islamic republic’s expanding nuclear programme.
Oil was roughly flat on Thursday as fears of an immediate military escalation subsided. Still, the rally caught off guard those traders who had been betting that oil would keep falling due to the Opec+ decision to accelerate the return of idled production and an expectation that US President Donald Trump’s tariffs will hurt demand.
“The market had gone too short too soon,” said Amrita Sen, director of research at consultants Energy Aspects.
Traders had assumed that the production increases by Opec+ would have a bigger immediate impact and failed to recognise that the current market was “actually very tight”, she said. “Then, of course, geopolitical tensions led to a bigger short-covering rally,” she said, referring to when bearish traders have to quickly buy back their positions.
The upwards price move is likely to have pleased Opec+, which is in the middle of restoring up to 2.2mn barrels per day of production after holding back supply for almost three years to try and push prices higher.
While traders and analysts continue to debate the cartel’s motivations, most agree that the cuts were no longer working, meaning it made sense to begin restoring output in the hope of retaking market share even if it pushed prices lower.
Several members of the group, in particular Kazakhstan, had been pumping above their quota, frustrating Saudi Arabia, which had shouldered the majority of the cuts. At the same time, although oil prices have dropped from about $75 a barrel at the start of the year, global oil inventories were still low, which gave Opec+ a “window to act”, Sen added.
The timing of Opec+’s decision to fast-track its production increases has led to some speculation that the cartel might have been responding to pressure from Trump to increase output ahead of a potential confrontation with Iran.
The US has held several rounds of talks with Iran in an effort to reach an agreement to curb Tehran’s nuclear activities, with the next round of negotiations scheduled for Sunday. But Trump has also warned he will consider military options to prevent Iran from securing a nuclear weapon if diplomacy fails.
Israel has also pushed for strikes against Iran, believing the Islamic republic is at its most vulnerable in decades and it has an opportunity to attack.
Jorge León, head of geopolitical analysis at Rystad, said Saudi Arabia had painful memories of increasing output the last time Trump pledged to throttle Iranian production and would be reluctant to make the same mistake.
In June 2018 the cartel agreed to increase output by 1mn b/d in response to Trump’s calls to help keep prices down amid increased American pressure on Tehran, only for the US president to then grant waivers for eight countries to keep importing Iranian oil. The moves helped send the oil price crashing to a low of $49/b by December of that year.
Saudi energy minister prince Abdulaziz bin Salman remembers that sequence of events clearly and insists he will not make the same mistake twice, according to people familiar with his thinking. He “won’t want that to happen again”, León said.
The Saudi energy ministry did not respond to a request for comment.
Riyadh would also want to avoid any suggestion that it had been collaborating with the White House against Tehran, according to Sen at Energy Aspects.
“I don’t believe that Saudi Arabia or other regional players want to get dragged into the wider conflict, given the risks they have to their infrastructure from any [Iranian] attack,” she said.
Amena Bakr, head of Middle East and Opec+ at analytics group Kpler, said the production increases had instead been timed to meet a seasonal increase in demand for oil for domestic power generation in the Gulf. The eight members of Opec+ had decided to “speed up the unwinding of the cuts during the summer period where demand domestically is higher and can buffer the added increments”, she said.
For now that demand appears to be one of the factors preventing a further sell-off, say analysts. However, many still forecast a surplus by the fourth quarter, driven by the increased supply from Opec+, despite a slowdown in US production growth due to the impact of lower prices.
Morgan Stanley forecasts a global oil surplus of 800,000 b/d by the fourth quarter of 2025, increasing to 1.3mn b/d in 2026, which it expects to push Brent prices towards the mid-$50s in the first half of next year.
After this week’s rally, Rystad’s León argues it is even more likely that Opec+ will continue with its accelerated production increases in August and September.
“If I am Opec+ and I want to keep increasing my production in the coming months then this is good timing. It’s much easier to unwind cuts with $70 [per barrel] as opposed to with $60.”