Quick Bites | Middle East War & Oil Price Impacts Markets

The market response to the continued conflict in the Middle East suggests that investors expect a sharp but temporary shock, one that may fade over the coming weeks. While the situation is still highly unpredictable, developments over the last few days suggest there is still a meaningful risk that the conflict will cause prolonged energy disruptions.

Why Markets May Be Underestimating the Duration of the Shock

Looking to the near‑term horizon, the financial market reaction turning more negative hinges on indications of sustained energy and global shipping market disruptions. Energy infrastructure stays a primary area to monitor for economic and financial market impacts, spanning both higher oil prices and the risk of broader economic disruption from energy shortages.

Source: FT

Conflict escalation: The initial US-Israel air strikes on Iran broadened into a more regional conflict, with thousands of air strikes and Iranian missile and drone retaliation across the Middle East, including civilian infrastructure targets.

Energy system stress: Iran oil storage facilities have been damaged, and the Strait of Hormuz has been effectively closed to shipping, significant given that roughly 20–25% of global crude oil and liquefied natural gas (LNG) shipments pass through this route.

Production and logistics constraints: Energy‑related activity has been disrupted across the region, including stoppages in Qatar LNG production and Saudi Arabia oil refining, while storage limitations have forced some countries to slow oil production.

Political continuity in Iran: Iran’s succession plans named Mojtaba Khamenei as the next supreme leader, signalling a continued hardline policy stance.

The risk associated with continued escalation is that strikes damage critical energy facilities, shifting disruption from temporary to more structural. As is usually the case, this risk cuts both ways. In other words, de-escalatory rhetoric or reduced conflict intensity would be well-received.

From Regional Conflict to Global Supply Chain Risk

The distinction between short-term stoppages and facility damage matters. Production can restart quickly once security improves; facility damage takes long to repair and can keep supply impaired well after active conflict subsides. Potential attacks on Iran’s Kharg Island oil export facilities, or more damaging strikes on major energy facilities in Saudi Arabia, the UAE or Qatar would sharply raise concerns about a sustained derailment in global energy markets. Even if Iran’s stockpiles of weapons are severely depleted, by blocking ships in the Strait’s channels, Iran could make passage through Hormuz far more treacherous without formally closing it.

Source: FT

Because energy markets are globally integrated, this is not just a regional issue. Even if hostilities ease, shipping disruptions, rerouting, insurance constraints and delayed repairs could keep energy supply tight and global logistics strained, and therefore exerting upward pressure on global inflation trends.

Source: NYT

Source: Evans & Partners

How Markets Have Reacted

The financial market reaction through the first 10 or so days of the conflict followed the pattern of prior geopolitical events, with oil prices higher and sharper spikes in other energy commodities most affected by potential shortages. Since the conflict began on February 28, crude oil prices are up around 30% along with 40%+ surges in Europe and Asia natural-gas-related benchmarks, especially as much of the energy products shipped through the Strait of Hormuz head to Asia.

Source: WSJ

Global interest rates have moved somewhat higher. Rates have risen 15-25 basis points in the US versus 20-30 bps or higher across countries in Europe. The US dollar has strengthened while gold has been choppy. The equity market picture has been more nuanced with equities negative overall and rotation – where prior market leaders have been hit hardest versus relative resilience for laggards.

On the surface, we seem to be sitting on a 4-6% decline for most developed market indexes, which might appear a bit modest given the overall severity of this geopolitical event. Non-US equities have been hit harder with emerging markets down in the 6-8% range.

Low Oil Previously Offset Tariffs. Now, not so much!

Source: BCA Research

The volatile backdrop has caused extreme moves in some recent market winners. A notable example was South Korea’s equity market, which saw three consecutive near-double-digit daily moves last week (-7% loss, -12% loss, +10% gain) in a market that was up nearly 50% year-to-date heading into last week.

VIX spikes

Source: Bloomberg

What’s Next

The Iran war will remain the main area of focus for global financial markets. Key downside risk signals include evidence of physical damage to energy facilities, further escalation that increases the probability of infrastructure strikes and continued blocking of shipping through the Strait of Hormuz.

Duration is key: Markets appear to be pricing a disruption measured in a couple of weeks, while the mix of escalation, logistics constraints and the potential for infrastructure damage keeps on the table the risk that the shock lasts longer and lingers through global supply chains even if hostilities eventually de‑escalate.

Commodities are winning

The image below is instructive. It shows the massive rise in commodity prices. This index is a good representation of the entire commodity complex. Roughly one third of it is energy, including West Texas Intermediate crude oil, Brent crude, gasoline and natural gas. Another third is metals, split between precious metals like gold and silver and industrial metals such as aluminium, copper, nickel, and zinc.

About 21% is in grains, including corn, wheat, and the soybean complex. The rest is made up of soft commodities like coffee, cotton, sugar, and cocoa, along with livestock such as live cattle, feeder cattle, and lean hogs. In other words, strength is showing up across the entire asset class.

Source: TrendLabs

From a portfolio perspective, we stay focused on diversification. Real assets such as property, natural resources and listed infrastructure are useful diversifiers during prolonged geopolitical risk events.