Geopolitical premium on oil all but vanishes, markets say

The traditional geopolitical premium that typically lifts crude prices after conflicts largely vanished in 2025, even as the year produced high profile shocks including targeted strikes on vessels and renewed fighting in Europe. Market prices, trader commentary and portfolio managers now point to oversupply and softer demand expectations as the dominant forces compressing that premium.

Benchmark Dated Brent traded at about $64.23 a barrel on October 13, down from above $80 in January, according to S&P Global Platts assessments and trader reports through the year. By mid October some traders told market reporters they expected Brent could fall into the low sixties or the fifties, a view attributed in market notes to executives at major trading houses. At the same time structure in the futures market remained tilted toward prompt delivery, with Platts noting continued backwardation during 2025, a pattern traders read as evidence of relatively strong immediate physical demand even as forward curves softened.

Analysts and fund managers offered two interlocking explanations for why the geopolitical premium faded. Some argued that precautionary buying and political risk had propped prices earlier in the year, but that cushion has eroded. Simon Wong, portfolio manager at Gabelli Funds, said oil prices "have actually held up most of this year due to geopolitical risk premiums, as well as China purchasing oil for its crude reserves." Wong added that "if it weren't for the geopolitical risk premiums, oil prices would likely be even lower" and that "we are starting to see that now," indicating he sees the risk buffer unwinding.

Others framed the shift as a market correction to a persistent global supply surplus. Rob Thummel, senior portfolio manager at Tortoise Capital, told market reporters the premium embedded in oil prices related to geopolitical risk has "essentially evaporated" in 2025, a development he attributed to oversupply and weakening forward price expectations. Traders and funds cited expectations of a durable supply surplus and cyclical demand weakness, and one market note tied recent price declines to worries sparked by tepid United States jobs data that raised concerns about near term fuel consumption.

Despite the fading premium, several market participants cautioned that the change is not irreversible. One analyst identified as Hoffman warned that a pause in OPEC plus supply increases would likely support prices and that a renewed geopolitical risk premium could return if "peace hopes fade and sanctions on Russia are more strictly enforced." Hoffman also stressed that downside for oil appears "limited" because OPEC plus retains significant spare production capacity it can deploy "if prices fall too far." That capacity acts as a buffer against prolonged price spikes but also compresses incentives for aggressive price moves on limited disruptions.

For markets the practical effect has been lower inflation pressure from energy and renewed stress on high cost producers that rely on $80 plus prices. For policy makers and investors the key takeaway is that structural supply buffers and weaker demand expectations have supplanted much of the premium once priced for geopolitical risk, but that political developments or changes in OPEC plus strategy could quickly restore it.