US-Iran Tensions Fuel Oil Market Uncertainty

In a sudden escalation that threatens to alter global dynamics, the United States and Israel launched airstrikes against Iran’s leadership on Saturday. President Donald Trump claimed these strikes would not only diminish an immediate security threat but also empower Iranians to dismantle their regime.

Nearby oil-rich Gulf Arab countries braced for further repercussions as fears of increased conflict mounted. Tehran responded by firing missiles at Israel in retaliation, escalating the already tense situation in the region. The impact of this conflict is expected to reverberate across global markets and economies.

Crude oil prices have remained volatile since January, hovering around $73 per barrel—up 20% year-on-year. Concerns over potential disruptions due to these strikes prompted some major oil producers and traders to suspend shipments through the vital Strait of Hormuz, a crucial passage for about 20% of global oil supply.

Capital Economics’ William Jackson projects that even if this conflict is contained, Brent crude might surge to $80 per barrel—a level last seen during June’s 12-day war in Iran. A prolonged conflict could see oil prices escalate significantly higher—potentially surging to over $100 a barrel and sparking around 0.6-0.7 percentage points of global inflation, according to Jackson.

The geopolitical unrest is expected to compound already turbulent markets across the globe. The VIX volatility index has risen by nearly one-third this year amid Trump’s trade policies and a sharp tech sector sell-off. Analysts predict heightened volatility in currency markets, with traders likely moving away from riskier assets towards the dollar, yen, and franc as safe-haven currencies.

Israel’s shekel faced significant pressure upon hearing about the strikes, dropping 5% at the outset of the conflict last June and again after Israel targeted Iran’s Damascus consulate. Analysts caution that if this wave of volatility persists, it could result in a more sustained decline for the shekel—potentially falling further against major currencies like the US dollar and Swiss franc.

The Swiss franc, traditionally a safe haven currency during times of instability, is also expected to be under stress. Its year-to-date gain of 3% may not withstand an escalating conflict with Iran. Investors may seek refuge in gold or silver, which have seen record runs this year—gold has climbed by 22%, and silver has nearly doubled.

The U.S. dollar, a net energy exporter benefiting from rising oil prices, might see its value rise against most currencies except for the Japanese yen and Swiss franc. If tensions escalate with Iran’s proxies, JPMorgan predicts an even more significant shift in favor of the US dollar.

Global airlines canceled flights across the Middle East on Saturday as conflict spread. European weapons manufacturers, already up by 10% this year due to increased demand, could see their fortunes improve further if airspace closures become widespread amid a broader conflict escalation.

The future of markets is uncertain, with uncertainty in bourses like Saudi Arabia and Qatar serving as early indicators of investor sentiment. If hostilities persist beyond a single day, the CEO of Neovision Wealth Management suggests Gulf equities may drop by 3-5%, following previous declines seen last month.