The Iran –Israel geo-political situation is uncertain, tense, and dynamic. It raises concerns about the potential impacts on the global oil markets. Interestingly the oil markets have remained non-responsive due to these shocks due to market fundamentals, strategic reserves of OPEC, and low direct threat to oil infrastructure. Even though Brent crude price has been reaching $80 per barrel we observe balanced market fundamentals as current supply matches or exceeds demand.

This trend shows that the market has not felt the direct impact of this conflict.

So far, the conflict has not posed any risk to the oil supply routes. The Strait of Hormuz is the world’s most critical oil chokepoint due to the massive volumes of oil that flow through it. One-fifth of the world’s oil supply relies on this passage, and there is no viable alternative for transporting oil from the region. Although no disruptions have compromised the oil supply route. However, the closure of the Straits of Hormuz by Iran (disrupting oil outflows) remains a significant risk leading to an increase in oil prices.

Major oil-producing countries like Saudi Arabia and the UAE possess significant spare capacity to mitigate potential shortfalls if disruptions are caused in the Middle East. This strategic reserve capacity acts as a buffer against oil price hikes sustaining market stability despite the geo-political tensions.

Game theory Scenarios help in analyzing not just immediate threats but also broader strategic behaviors of players and potential outcomes of these geopolitical tensions.

We can analyze this situation using the Game Theory, Key players are (1) Iran and Israel (Direct military engagement, political moves, alliances) shaping the regional landscape. (2) Saudia Arabia and UAE (Major Oil suppliers that have significant influence on global oil supply. Using their capacity to increase oil production is a deterrent to prolonged conflict leading to disruption in oil markets. (3) The US, EU, and China they are major consumers and exhibit strategic interest in maintaining oil supplies. They can influence the nations and regional actors with sanctions and military support.

If major players like the US, China and EU asses that aggressive actions by Iran or Israel may lead to undesirable counteractions they can influence their behaviour by maintaining stability limiting the shocks and impact on oil prices.

If Iran believes that escalation may lead to a reconfiguration of power dynamics like the closure of the Straits of Hormuz leverage them better nuclear and economic negotiations. This may cause temporary market oil shocks.

In the long run, the repeated games could lead to a predictable pattern of outcomes potentially leading to diplomatic negotiations. Conversely, if the conflict persists it may lead to long-term oil market strategies and infrastructure investments in oil supply routes and alternative energy sources.

Strategies of all players are interdependent and changes in the strategies may significantly impact the oil markets.