David McNamara: Trump and Iran spitting fire again but oil markets staying calm

Markets jolted by fresh strikes but the overall impact has been muted compared to the early days of the war in March

US president Donald Trump virtually ruled out a deal with Iran but oil markets have remained relatively calm. Picture: AP Photo/Alex Brandon

The relatively muted market reaction to the news of a resumption in hostilities between the US and Iran may reflect some complacency on the part of investors. 

However, it also highlights the material shift in energy markets since the war began, with buyers de-risking exposures to the Middle East, to the benefit of other producers, such as the US.

The market was jolted by fresh strikes last week, with equities falling and brent crude oil trading up towards at $77 to $80 per barrel range, compared to the $70 to $73 range of recent weeks. However, the overall impact has been muted compared to the early days of the war in March. 

This relative blip in markets is somewhat surprising given the fiery language from both sides, including US president Donald Trump at the Nato summit in Turkey all but ruling out a future deal. Markets might be betting that the latest flare-up is merely brinkmanship as both sides move towards a lasting deal.

However, the becalmed nature of oil markets also reflects the shift in energy supply since February. Recent analysis by the International Energy Agency (IEA) shows several factors have led to lower peak oil prices then some doomsday forecasts in the initial aftermath of the war in March. 

Firstly, demand has contracted sharply. Global oil demand is forecast to decline by 1.1m barrels a day in 2026. This represents sharp downgrade compared with previous estimates. Major importers such as China and Japan have reduced oil imports, at least temporarily. Energy rationing and a move towards renewables have also been factors. Exports of solar panels and EVs from China have surged.

Secondly, global oil stocks have been reduced, dampening the supply squeeze from the Middle East, in efforts coordinated by the IEA in the early period of the war. Fortunately, global oil stocks were relatively high coming into the war, and have fallen by about 25%, with OECD countries reserves reaching the lowest level since 1990.

Thirdly, the laws of supply and demand have asserted themselves, with producers elsewhere upping production to meet demand. In particular, US oil exports have reached fresh highs, and refineries in Europe have pivoted to producing jet fuel to replace supply lost from Middle East producers.

How durable these shifts in oil supply and demand remain to be seen, but they highlight the agility of global markets in the current environment, negating a more damaging cycle of higher oil prices.