The Iran Risk Is Keeping Oil Prices Elevated

On paper, oil prices should be falling.

The Energy Information Administration reported a 16-million-barrel build in U.S. crude inventories — the largest weekly increase in three years and far above expectations. In a purely fundamentals-driven market, oil prices would generally dip following that kind of surprise.

Instead, Brent is holding above $70.

That tells you the market is pricing risk, not just barrels.

The Strait of Hormuz Factor

Roughly one-fifth of the world’s petroleum liquids move through the Strait of Hormuz. The shipping lanes themselves are only about two miles wide in each direction. There is no realistic alternate route for most Gulf exports.

When tensions rise between Iran and the United States — or between Iran and regional actors — the market begins pricing in the possibility of disruption. The threat needn’t be of a full closure. Even temporary interference, tanker seizures, missile threats, mining activity, or insurance restrictions can tighten supply flows and spike freight rates.

The oil market doesn’t wait for supply to be lost. It prices the probability of disruption. That growing probability is what is holding prices up.

Iran’s Export Calculus

Iran is estimated to be exporting roughly 1.3 to 1.5 million barrels per day, much of it to China through various intermediaries. Remove those barrels, and the global balance tightens quickly.

There are also signs that Iran has been accelerating loadings from Kharg Island, its primary export terminal. Whether that reflects routine sales timing or precautionary behavior, the signal to markets is the same: geopolitical stress is elevated.

In a market that was already tightening modestly, the potential loss or even temporary interruption of more than a million barrels per day is meaningful.

Why the Inventory Build Isn’t Enough

Yes, U.S. inventories jumped. But one weekly data point does not offset geopolitical tail risk.

Markets distinguish between structural oversupply and temporary stock fluctuations. The current build could reflect refinery maintenance, weather disruptions, or import timing. Meanwhile, geopolitical risk is forward-looking.

Traders are effectively saying that inventories can rise, but if the Strait of Hormuz becomes unstable, inventories will matter a lot less.

That risk premium is widely estimated in the range of $7 to $12 per barrel embedded in current Brent pricing. Strip out that premium, and crude likely trades in the low $60s.

But until tensions ease, that premium stays.

The Strategic Petroleum Reserve Backdrop

The U.S. Strategic Petroleum Reserve currently holds roughly 415 million barrels of crude oil. That sounds large, but so is the scale of U.S. consumption.

The United States consumes about 20 million barrels of petroleum per day. On that basis, the SPR represents just over 20 days of total U.S. petroleum demand.

However, that figure requires context. The SPR cannot be drained instantly, and it is not designed to replace total consumption. Its maximum sustained drawdown capacity is around 4 to 4.5 million barrels per day under ideal conditions. That means in a severe disruption scenario, it could only temporarily offset a fraction of global supply losses. However, it could significantly improve the picture for U.S. crude oil imports.

The reserve is best understood as a shock absorber. It can smooth short-term dislocations, calm panic, and buy time for markets to adjust. It cannot neutralize a prolonged geopolitical crisis in the Persian Gulf.

Markets know this. That is why the existence of 415 million barrels in storage does not eliminate the embedded risk premium in oil prices. It simply moderates the extremes.

In other words, the SPR reduces volatility. It does not remove geopolitical risk.

The Bigger Picture

We are seeing a classic split market.

On one side, U.S. production remains near record levels, and inventories are building. On the other, the world’s most important oil chokepoint is tied to escalating tensions involving a major regional producer.

Oil is not ignoring bearish data. It is discounting it against something potentially larger.

As long as nearly 20% of global oil supply flows through a narrow waterway adjacent to an increasingly unstable flashpoint, prices will reflect that risk.

That is the real story behind oil holding above $70.