Fears of a US-Iran conflict disrupting oil flows are overstated. Any potential US military action would likely be designed to be 'surgical' to specifically avoid Iran's oil infrastructure, as the administration's priority is preventing economic shocks and energy price hikes ahead of elections.

While Venezuela is a minor oil supplier to China, Iran is a substantial source of crude and heavy oil used for infrastructure projects like asphalt. A regime change in Iran could lead to the country selling its oil to the West instead of China, creating a significant economic and geopolitical destabilization for Beijing.

Despite rising oil prices, there's no evidence of a supply shortage. Physical market indicators have even softened. The rally is fueled by investors buying "insurance" against potential geopolitical disruptions, creating a risk premium that doesn't reflect the market's weak underlying fundamentals.

The crude oil market is trapped in a recurring monthly pattern. For the first half of each month, the forward curve weakens on fears of a supply glut, nearly flipping into contango. Then, a sudden geopolitical shock mid-month causes the curve to snap back into pronounced backwardation, delaying the surplus.

Despite market fears over Iran and Russian sanctions, J.P. Morgan believes no real supply disruption will occur. The White House's focus on midterm elections will prevent escalations that impact oil supply, and Russia can easily sell its crude at a discount, leading to a surplus.

While many fear production shutdowns, a more significant and probable risk is a logistical shock from shipping disruptions. Even modest delays in tanker transit times could effectively remove millions of barrels per day from the market, causing a significant price spike without a single well being shut down.

Based on its energy (BTU) equivalent, the price of natural gas has historically been about one-sixth the price of a barrel of oil. Currently, it trades at a much steeper discount (around 1/20th), making it arguably the most undervalued commodity in the last 50 years.

Historical precedent suggests that in a positive growth environment, a geopolitical shock like a potential US-Iran conflict might not lead to a sustained risk-off rally in the US dollar. Markets may price out the risk premium quickly, allowing pro-cyclical trends to resume, as seen in a similar event last year.

Despite heightened U.S.-Iran tensions, oil prices show only a minor risk premium (~$2). The market believes an oversupplied global market, coupled with a U.S. preference for surgical strikes that avoid energy infrastructure, will prevent a major supply disruption.