Global oil markets paused their rally on Wednesday, as stronger-than-expected U.S. labour market data counterbalanced mounting geopolitical risks stemming from an intensifying Middle East conflict that has already injected a significant risk premium into crude benchmarks.
Brent crude futures for May delivery slipped 0.6 per cent to $80.91 per barrel, while West Texas Intermediate (WTI) fell 1.1 per cent to $73.77 per barrel. The pullback follows a two-day rise that saw both contracts climb nearly 12 per cent combined, including a 5 per cent jump on Tuesday alone. Brent had earlier touched its highest level since July 2024.
The earlier rally was driven by escalating hostilities after coordinated U.S. and Israeli strikes over the weekend targeted Iranian military infrastructure, killing Supreme Leader Ali Khamenei. According to U.S. Admiral Brad Cooper, who leads American forces in the region, more than 2,000 Iranian targets have since been hit.
Iran has retaliated with missile and drone attacks aimed at neighbouring Arab states hosting U.S. military bases, while also issuing warnings to global shipping operators. Of particular concern is the Strait of Hormuz, the narrow maritime corridor that handles one-fifth of global oil shipments. Tehran has reportedly targeted oil tankers transiting the waterway, raising fears of supply disruptions.
The Strait is a critical export artery for major producers including Saudi Arabia, Iraq, and the United Arab Emirates. Any sustained interruption to flows through Hormuz would have profound implications for global energy markets.
Analysts at ING noted that disruption fears are already affecting supply dynamics upstream. “The disruption to oil flows through the Strait is starting to affect oil flows further upstream,” the bank said in a note.
Iraq has emerged as an early casualty of the tension. Iraqi oil officials confirmed that the country has more than halved its oil production as tankers avoid the Strait and domestic storage capacity reaches its limits. Output at the giant Rumaila oilfield has been cut by 700,000 barrels per day, while production at West Qurna 2 has fallen by about 450,000 barrels daily. The Maysan field has seen a further 350,000 barrels per day reduction, and crude production in the northern Kirkuk region has been suspended as a precaution.
The scale of these cutbacks shows how quickly geopolitical risk can translate into tangible supply constraints. However, oil’s retreat on Wednesday reflected countervailing macroeconomic forces. Fresh data from ADP showed U.S. private payrolls rose by 63,000 in February, exceeding expectations of 50,000 and marking the strongest reading in nearly a year. The figures provided reassurance that the U.S. economy remains resilient despite elevated geopolitical risk.
Market participants are now turning their attention to Friday’s nonfarm payrolls report, which will offer a broader view of labour market strength and potentially shape expectations for Federal Reserve policy.
One key concern among traders is the inflationary impact of elevated oil prices. A sustained increase toward $90 or $100 per barrel could reignite inflation pressures, limiting the Federal Reserve’s scope to cut interest rates. Higher-for-longer monetary policy would in turn dampen demand expectations, creating a feedback loop for energy markets.
Adding to the bullish supply narrative, Goldman Sachs on Wednesday raised its second-quarter 2026 average price forecast for Brent by $10 to $76 per barrel and for WTI by $9 to $71. The bank’s projections assume prolonged low flows through the Strait of Hormuz will trigger substantial declines in OECD inventories and Middle East production.
Goldman cautioned that risks remain skewed to the upside. “If Hormuz volumes were to remain flat for five additional weeks, Brent prices would likely reach $100,” the bank noted, warning that inventories could fall to critically low levels without demand destruction.
Yet analysts are equally wary of the reverse dynamic. Nikos Tzabouras, senior market analyst at Tradu.com, warned that what begins as a supply-driven rally could morph into a demand headwind. “The supply disruption tailwind could quickly turn into a demand destruction headwind. A prolonged conflict and sustained high prices may fuel oil-driven inflation and amplify economic risks stemming from renewed tariff uncertainty,” he said.
Meanwhile, geopolitical developments continue to evolve. President Donald Trump stated that the U.S. Navy would provide escorts for commercial vessels if necessary and pledged government guarantees to ensure safe passage through Hormuz. The assurance comes amid reports that insurers are cancelling war-risk coverage for ships operating in the region.
