The Recent Oil Price Spike is Unlikely to Drag on

by Larry Adam of Raymond James, 6/26/25

Key Takeaways

  • The recent oil price spike from the Israel-Iran conflict is unlikely to drag on
  • Geopolitical tensions have historically not derailed the equity market
  • Treasury yields have been unfazed by the Middle East conflict

Tensions in the Middle East and their effect on oil prices have dominated the recent news headlines—and for good reason. A rise in oil prices, especially if it lasts, can push up inflation and slow down economic growth. Federal Reserve Chair Jerome Powell has even noted in recent testimony that a $10 increase in oil prices could raise overall inflation by 0.2% and reduce growth by 0.1%. Any signs of escalating conflict could make the Fed’s job even tougher, especially as it also navigates uncertainties around trade tariffs. While the Fed often tries to look past temporary, geopolitically driven oil spikes, this conflict comes at a particularly fragile time for the economy. Even though market volatility is likely to stay elevated, we believe the US economy and financial markets are resilient enough to ride out this geopolitical storm with minimal lasting impact. Here’s why:

Oil Price Spike Is Unlikely To Drag On | The jump in oil prices since the Israel-Iran crisis started—a classic knee-jerk reaction to unrest in the Middle East—could soon add ~$0.20/gallon at the gas pump. The key question now is whether this spike in energy prices will be sustained for a long period of time and drive up inflation. Our prediction: probably not. Within days of the conflict starting, Israel reportedly gained control of Iranian airspace, putting Iran at a clear disadvantage. Some reports even suggest that Iran has called for peace talks. This situation stands in sharp contrast to Russia’s prolonged war in Ukraine, where early thoughts for a rapid victory in 2022 gave way to a drawn-out conflict.

  • Iran Plays A Smaller Role In The Oil Market Than You Might Think—Iran produces ~3% of global oil supply, but because of its large population (~80 million people) and high domestic demand, only around half of that is available for export. While Iran does control the Strait of Hormuz—a key waterway that ~20% of global oil shipments pass through—it’s unlikely that it would try to block it. Doing so would hurt Iran’s ability to export oil and risk alienating its major trade partners like China and India, who depend heavily on Middle Eastern oil. Right now, there are no signs that the current conflict will lead to an actual disruption in oil supply, something that would have global consequences. But if that were to occur, OECD countries collectively hold around 1.2 billion barrels of emergency oil stockpiles, enough to cover ~60 days of shipping volumes passing through the Strait of Hormuz.
  • Focus On Fundamentals: The Oil Market Is Oversupplied—If it were not for this crisis, oil prices would likely still be near 52-week lows. As always, it’s important to consider supply and demand from a worldwide perspective. In 2025, worldwide oil demand is expected to grow by less than 1%, held back by ongoing trade tensions and the rapid rise of electric vehicles in China. In contrast, oil supply is on track to grow 3x faster, as OPEC+ unwinds its production cuts and a near record number of new oilfields in countries like Brazil and Norway are ramping up output. With demand lagging and supply rising, the global oil market is becoming oversupplied—which tends to push prices down. That’s already showing up in the futures market, where prices are expected to trend lower over time.