Mahdi Feiz, Financial Analyst
For much of the past year, the oil narrative was straightforward: supply was ample, demand growth was moderating, and prices were largely anchored by fundamentals. That clarity is beginning to fade. While crude benchmarks remain relatively subdued, there are growing signs that markets are once again assigning value to geopolitical risk, specifically, the possibility of disruption in the Middle East.
As of mid-February 2026, Brent crude is trading roughly in the $69–$72 per barrel range, with WTI near $65–$68. On the surface, these are not stress-level prices. Yet the underlying market behavior tells a more nuanced story.
Traders are not pricing an imminent supply shock, but they are no longer fully discounting the possibility of one. In practical terms, the geopolitical risk premium in oil appears to be re-emerging, albeit cautiously.
Fundamentals Still Point to a Balanced Market
From a purely physical perspective, the global oil market does not currently look tight. The International Energy Agency (IEA) projects global demand at around 103.1–103.3 million barrels per day (mb/d) in 2026, implying growth of roughly 1–1.2 mb/d year-on-year. That pace is healthy but not exceptional by historical standards.
Supply dynamics remain supportive. US crude output continues to hover near record levels at approximately 13.2–13.3 mb/d, underpinned by efficiency gains in the Permian Basin. Additional incremental supply from Brazil and Guyana is expected to contribute roughly 0.6–0.7 mb/d this year.
Meanwhile, OPEC+ is still implementing voluntary cuts of about 2.2 mb/d, but crucially, the group retains meaningful spare capacity, estimated at 4–5 mb/d, largely concentrated in Saudi Arabia and the UAE.
OECD commercial inventories are also sitting close to their five-year seasonal average, a level typically associated with a market that is broadly in balance.
If fundamentals were the only driver, Brent in the high-$60s would appear broadly justified, which is precisely where spot prices are currently trading.
Why Is the Market on Edge?
The answer lies less in what has happened and more in what markets believe could happen.
Several forward-looking indicators suggest that traders are beginning to rebuild a geopolitical buffer into oil prices. Brent’s prompt time spreads have edged into mild backwardation, reflecting firmer near-term risk perception.
In the options market, the upside skew has gradually steepened, indicating stronger demand for protection against price spikes. Even tanker war-risk insurance premiums in parts of the Persian Gulf have nudged higher, though they remain far below crisis territory.
None of these signals point to imminent disruption. But collectively, they indicate a shift in market psychology.
The focal point, as always, is the Strait of Hormuz. Roughly 20–21 mb/d of crude and condensates (about one-fifth of global oil consumption) transit this corridor.
The market has long demonstrated a tendency to react not only to actual disruptions but to credible threats against this chokepoint. At present, the pricing suggests a modest geopolitical premium, likely in the $2–$4 per barrel range, has begun to creep back into the market.
Higher Structural Sensitivity
What makes the current environment notable is how quickly markets appear to be responding to geopolitical signals. Part of this reflects structural changes.
Global spare capacity is more concentrated than in previous cycles, largely in Saudi Arabia and the UAE. While this provides a theoretical buffer, the concentration itself can amplify perceived fragility if markets question how rapidly that capacity could be deployed in a crisis.
Investment trends also matter. Upstream capital spending outside US shale remains below pre-pandemic levels in real terms. The pipeline of large conventional projects is thinner than it was a decade ago, reducing the system’s margin of comfort.
Equally important is the growing role of systematic and momentum-driven trading. Oil markets today react faster to headlines than they did in earlier cycles. As a result, geopolitical developments, particularly those tied to military escalation, tend to transmit into prices more quickly, even when physical flows remain uninterrupted.
At current price levels near $70 Brent, the macroeconomic consequences remain contained. Historically, a sustained $10 per barrel increase in crude adds roughly 0.2–0.3 percentage points to global headline inflation over the following year. For now, oil is not high enough to materially derail the global disinflation trend.
However, the timing is delicate. Major central banks, including the Federal Reserve and the European Central Bank, are approaching potential easing phases later in 2026. Should geopolitical tensions push oil meaningfully higher, the path toward rate cuts could become less straightforward.
For emerging markets that are net oil importers, even modest price increases can widen current account deficits and pressure currencies. Conversely, energy exporters, particularly in the Middle East, would see improved fiscal breathing room if prices firm further.
Risk Premium Is Forming, Not Surging
The key point is that oil markets are beginning to price risk, not disruption.
Physical supply flows remain normal, inventories are comfortable, and OPEC+ retains a credible buffer. But the market’s mental model is shifting. Traders are once again assigning probability, however small, to war-related supply risk.
If tensions remain contained, Brent will likely oscillate in the $65–$75 range in the near term. A material escalation affecting shipping routes or energy infrastructure could quickly lift prices toward $85–$95. Conversely, visible de-escalation would likely compress the emerging premium.
For now, the message from the oil market is subtle but clear: the war risk premium has not fully returned, but it is quietly rebuilding beneath the surface.
