Investec Risk Solutions


Fuel Oil Market Update


Thursday, 19 February 2026

The primary focus of oil markets currently, is of course Iran and the possibility of a military confrontation with the US. At the time of writing Brent is around its high of the year, which was reached at the end of Janurary at 72 \$/b. To estimate how much of the current price is made up of perceived Iran risk, it makes sense to go back to early Janurary when Brent was trading at 60 \$/d or even a tad lower. Had things continued as they were at that time, with the surplus in the market manifesting itself as a build of crude in Asia, Brent might well have continued further down under 60 \$/b. Consequently, the premium connected with Iran looks to be over 10 \$/b.

There have been two key strands to US policy:

1. A military build up to force Iran to the negotiating table
2. Targeting the transportation of sanctioned crude and its buyers

The latter focus has been much broader than just Iranian crude, in fact the most notable development has been Trump’s agreement with Indian President Modi to lower tariffs on Indian goods in return for India eschewing Russian crude. This leaves China as the main remining buyer of Russian oil and at a commensurately steep discount to Brent.

Researchers counting barrels point to an oversupplied market. It its latest monthly report, The International Energy Agency (IEA) cut its estimate of the amount OPEC needs to produce to balance the market this year (the call on OPEC) by 100 kb/d to 25.7 mb/d. This compares to the IEA’s estimate of OPEC output for the month of Janurary of 29.3 mb/d, suggesting a surplus of 3.6 mb/d. Such a large surplus should put oil under significant pressure, but not all barrels are equal. The brunt of the surplus is naturally borne by sanctioned barrels as buyers are so limited and these end up in Aisa. Benchmarks like Brent, reference the bona fide unsanctioned market, where demand could be increasing relative to sanctioned barrels, as buyers switch from it to bona fide crude.

The US military build-up has urged Iran to negotiate – two rounds of talks have now been held, but it is unclear what will happen next. After the talks on Tuesday, Iran said that they had "reached an understanding on the main principles", but JD Vance managed expectations later in the day by saying "it was very clear that the president has set some red lines that the Iranians are not yet willing to actually acknowledge and work through." Then, there were media reports citing unnamed sources, stating that "the US is closer to a major war in the Middle East than most Americans realize. It could begin very soon." Certainly there are lots of reports of flight tracking data showing that the US is continuing to move military assets around in preparation for something. Today at the inaugural meeting of the Board of Peace, Trump said that the world will find out "over the next, probably, ten days" whether the US will reach a deal with Iran or take military action."

How much markets react to the possible outcomes?

1. A deal is reached
   If Iran and the US reach a deal Brent might retreat rapidly, potentially by to 60 \$/b.
2. Talks fail – limited military action
   If Iran and the US fail to reach a deal, but the subsequent US action is limited in scope (like bombing nuclear facilities and calling it a day) Brent might initially spike higher, but then fall back, with the potential to return to 60 \$/b.
3. Talks fail – protracted military action
   This is the complex outcome unpredictable outcome, possibly involving other countries in the region, which leads to an extended risk premium and possibly actual supply disruption. 100 \$/b plus might be on the cards.

The increasing implied volatility of high strike calls on Brent, points to strong demand for upside protection. This can be either from speculators taking a view that a conflict could lead to a significant escalation on prices or consumers looking to protect themselves from one. If market makers writing these call options cannot offset their positions, they must hedge themselves by trading the futures to replicate the option payoff. If prices rise, the amount of futures hedges the market maker needs, increases and so they have to buy more futures – which pushes the price higher, creating a feedback effect. This dynamic makes the oil market even more sensitive to price spikes than it normally is.

Depending on how events unfold, Brent has the possibility of breaking out of the 70s and testing the 75 to 80 \$/b seen last year when the US became briefly involved in the Iran/Israel conflict. Above that we have highs over 80 seen in 2024 when the world was still dealing with the disruptive effects of the Russian war in Ukraine. If at some point a line is drawn under this conflict, Brent may become vulnerable to retesting 60 \$/b and last year’s lows around 58 \$/b – perhaps lower.

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