Oil, markets digest escalation risks ahead of US-Iran talks

Oil prices hovered near seven-month highs on Wednesday as investors awaited the outcome of high-stakes US-Iran nuclear talks set for Thursday in Geneva, with markets weighing the possibility of new US military strikes should diplomacy falter. 

International benchmark Brent crude traded at $70.80 per barrel as of 10:46 AM EST, holding above the $70 mark for a sixth consecutive session and reaching its highest levels since July 2025. 

The gains come after President Donald Trump said last Friday that he is considering limited military strikes to pressure Tehran over its nuclear program and Washington has massed additional military assets in the region. 

Details: Despite the recent rally, oil remains below levels seen during the 12-day war between Israel and Iran last June, when Brent briefly spiked close to $80 per barrel ahead of US strikes on Iranian nuclear facilities. Prices retreated quickly after hostilities subsided and supply disruptions failed to materialize. 

This time around, market fears have been less pronounced. Wall Street’s so-called fear gauge, the CBOE Volatility Index, has trended higher in recent weeks but remains roughly 60% below its June 2025 peak and has yet to flash acute stress. 

Oil-specific volatility has been more reactive. The CBOE Crude Oil ETF Volatility Index has climbed to its highest level of 2026 this week, though it too remains below last June’s highs. Still, the oil market gauge has steadily risen during a turbulent start to a year that began with the United States ousting Venezuelan President Nicolas Maduro and asserting control over the OPEC member’s oil sector. 

Amid this uncertainty, Gulf equity markets have posted mixed performances ahead of the talks. As of market close on Wednesday, Saudi Arabia’s benchmark Tadawul All Share Index has fallen about 1.3% this week and is moving sideways in February. For the year, the kingdom’s index is up about 3%. Meanwhile, industry giant and bellwether Saudi Aramco’s stock has edged higher this week and is up about 8% so far in 2026. 

In the United Arab Emirates, Dubai’s main stock index has been flat this week after posting a strong start to 2026, with the market up about 7% on the year. Qatar’s benchmark gauge has also moved sideways as of midweek, posting a slight weekly gain but slipping around 2% over the past two weeks. 

Why it matters: For now, investors appear relatively sanguine about the risk of escalation despite signs of caution. A serious US-Iran military confrontation — particularly any Iranian effort to disrupt flows through the Strait of Hormuz — could trigger a supply shock. Yet markets appear to be betting that Washington can pressure Tehran without igniting a broader oil crisis, aided by record US output. 

More broadly, this relatively muted reaction suggests risks from the Middle East no longer move markets as forcefully as they once did. Whether that reflects resilience or complacency may soon be tested.

In the Gulf region, however, the stakes are different, as oil remains the key catalyst for local markets and fiscal stability despite efforts to diversify their economies. This became evident on Monday, when Saudi Arabia’s Finance Ministry reported that its budget deficit widened to $25.3 billion in the fourth quarter of 2025, bringing the full-year shortfall to nearly $74 billion, more than double 2024’s level. 

Lower oil prices have strained the kingdom’s finances even as spending remains elevated. The International Monetary Fund estimates Riyadh’s fiscal breakeven oil price for 2026 at around $90 per barrel, well above current levels. 

A sustained move above $70 would offer some relief for producers grappling with oversupply, but it would not fully close Saudi Arabia’s budget gap.