How does geopolitics impact oil price discovery?

Few scenarios betray the intimacy between geopolitics and oil prices like unrest in the Middle East. At the time of writing, the US and Israel are shelling Iran in attempt to overturn the incumbent regime and eliminate its military assets. Having been installed as the country’s new supreme leader following his father’s assassination, Mojtaba Khamenei is directing Iran’s armed forces, the Islamic Revolutionary Guard Corps, to retaliate against US-allied installations in the region. Thus far, Iranian ordnance has fallen on Jordan, Israel, Lebanon, Cyprus, Syria, Iraq, and the Gulf states – and triggered UK expats to temporarily return home.

This isn’t the first time unrest in the Middle East has been linked to oil price volatility. In 1990, Iraq’s invasion of Kuwait triggered an oil price shock that contributed to the early 1990s recession. Similar issues arose in the wake of the US-UK Iraq war of 2003 and Libya’s civil war of 2011.  

So, how are geopolitics and oil prices connected, and why does it matter? In this instalment of Finextra’s Explainer series, we consider the factors that contribute to oil price discovery, how they can be weaponised, and what it means for monetary policy, central banks, and consumers.

A case study: Turm-oil in Hormuz

With its nuclear base crippled and much of its military capabilities razed, Iran is now leaning into a secret weapon: its chokehold over the global economy, via the strait of Hormuz. Through this circa 60-mile-wide corridor of water connecting the Persian Gulf to the Arabian Sea, 20% of the world’s oil trade flows. Most of it comes in the form of crude oil, which is stored in barrels and carried by tankers. In closing the strait, Iran strikes at the Achillies heel of the US: the dollar, in which oil is priced globally.

With no guarantee of safe passage, oil supply out of the Persian Gulf has nigh-on dried up, and the cost per barrel is beginning to breach $100. On 15 March, the International Energy Agency reacted by announcing the release of over 400 million barrels of oil from its emergency reserves – a record-breaking amount. But even a volume like this will only buy several days before supply is again choked.

The Hormuz crisis lifts the hood on how oil price discovery works. It is a continuous process of determining the spot or future price of crude, by matching buyers and sellers. The formula is abstract; oil’s pricing is still tied to fixed trading windows that were established decades ago. When sessions close, reference prices cease updating – even as risk exposure, macroeconomic developments, and trading activity continue.

Setting prices: A well-oiled machine

Price discovery is a continuous, high-frequency process, and trading desks often use a clutch of methods to avoid manipulation from closing outliers. It is the mechanism by which traders, companies, and governments reach a fair value for oil at any given moment, by balancing market uncertainties.

Oil prices are primarily driven by supply and demand, which in turn are staged by geopolitics. This matters because – as a primary input for energy, transportation, and manufacturing – oil scarcity can push up supply chain costs, weigh on household purchasing power, and hobble economic growth. As the precursor to innumerable industry and consumer goods, supply issues drive stagflation. This is a particular challenge for central banks, since it can’t be redressed by pushing up interest rates, as is the case with demand-driven inflation. 

Largely discovered on international exchanges, oil prices use benchmarks like West Texas Intermediate (WTI) and Brent to set global standards. Futures contracts serve as a key price discovery mechanism, since they are highly liquid and enable traders to react to news and information before spot markets. The process essentially aggregates information about supply – including, but not exclusively, Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC production – and demand, such as economic activity or consumer behaviour. All these factors contribute to setting a reasonable transaction price, which as of 17 March 2026 can be accessed 24/7 through the Pyth Oil Index.

This is the very reason seemingly extraneous factors impact oil prices. Not limited to geopolitical unrest, inputs can include industrial activity, the strength of the US dollar, inventory and reserve levels, regional storage capacity, the futures market, production issues, and – in the longer term – the alternative energy transition.

Oils well that ends well?

The nature of the markets is such that when one party loses, another must necessarily win. Russia appreciates this mechanism most today.

With cost-per-barrel now reaching beyond $100, and consumers feeling the pinch at the pumps, the Kremlin can claim more for an export that since 2022 has lined its war chest. Ukraine – and the West – looks on as Putin exploits this moment of volatility to achieve his imperialist aims, while China continues to be exempted from the Hormuz blockade.