Oil prices are elevated, but not dramatically so. The geopolitical premium currently embedded in Brent looks closer to $5 than $10, and arguably, we would have been $5 higher anyway on underlying demand. Right now, traders are weighing rumour against fact. The rumour is escalation around Iran. The fact is there has been no disruption to supply. And as long as that remains the case, prices are unlikely to spiral higher.
Markets appear to be pricing in limited action, perhaps airstrikes or a contained military exercise, but nothing that materially disrupts oil flows. If that assumption proves wrong, pricing will adjust rapidly. But until rumour becomes fact, the ceiling remains constrained.
Demand signals remain firm. Large open interest delivery cycles in January and February suggest strong buying from China and India. Chinese stockpiling should not be dismissed, it is demand. Storage expansion and opportunistic buying of discounted barrels are structural features of the market. OPEC+ will factor this steady demand in its upcoming decision. There is little conviction within the group that the market is oversupplied.
For now, optimism prevails. But markets should remember: if you carry a large military hammer, every problem can begin to look like a nail.