Article by Colin Attard
The escalating conflict in Iran has triggered an exogenous supply shock in global energy markets, sending oil and gas prices sharply higher and unsettling financial markets worldwide. With key energy infrastructure disrupted and shipping routes paralyzed, investors are grappling with a wide range of possible economic outcomes — from a short-lived market shock to a prolonged period of stagflation.
Energy markets have reacted swiftly. Oil prices have surged while options markets show a sharp rise in call option premiums, suggesting traders are increasingly hedging against further price spikes. Using historical supply disruptions as a guide, Bloomberg analysts estimate that a 1% drop in oil supply typically pushes prices up by roughly 4%. A prolonged closure of the Strait of Hormuz could therefore lift prices by around 80% above pre-war levels, potentially taking crude to about $108 per barrel. Natural gas markets have also reacted strongly, particularly in Europe, where prices and volatility surged after Qatari LNG production was taken offline.
However, the outlook for energy markets remains highly uncertain and depends largely on two factors: the duration of the war and the extent of infrastructure damage. If the United States and Iran reach a ceasefire and shipping routes reopen, oil prices could fall back toward their pre-war average of around $65 per barrel. Under this outcome, global inflation pressures would ease and the economic impact would remain limited. If fighting continues but energy infrastructure remains largely intact, oil prices could stabilise near $80 per barrel. Inflation would rise modestly — Bloomberg analysts estimate roughly 0.3 percentage points in the United States and 0.5 percentage points in the euro area and the United Kingdom — while economic growth slows but avoids severe damage. In the most extreme case, prolonged conflict and further strikes on energy infrastructure — including facilities operated by Saudi Aramco — could keep oil prices near $108 per barrel or higher into the end of the year. Such an energy shock would significantly raise inflation while simultaneously weakening growth, creating the risk of stagflation in several major economies.
Higher energy prices affect the global economy through multiple channels. They increase costs for consumers and businesses, reduce purchasing power, and raise prices for transportation and goods reliant on petrochemicals. For central banks, the key question is whether inflation expectations remain anchored. If they do, central banks may look through the temporary inflation spike and focus on supporting growth. If expectations rise, however, policymakers may be forced to raise interest rates, despite slowing economies.
The economic consequences of the conflict vary by region. In the United States, the impact on growth may be limited because the country’s large shale oil sector offsets some of the damage caused by higher fuel prices. However, inflation could still rise significantly — potentially exceeding the Federal Reserve’s 2% target for a prolonged period. For the euro area and the United Kingdom, the outlook is more challenging. Both economies import most of their energy, making them highly vulnerable to sustained price increases. China also faces headwinds. The world’s largest energy importer had benefited from discounted Iranian crude due to sanctions. Losing that supply could raise inflation and compound existing economic pressures.
Global financial markets have already begun adjusting to the new risks. Stock markets have fallen sharply, particularly in Europe, Asia and emerging markets. Higher energy prices are seen as growth-negative, which could force equity valuations lower. Government bond yields have risen as investors reduce expectations of interest-rate cuts in the face of rising inflation. The US dollar, which often strengthens during supply-driven oil shocks, could see renewed upward momentum. The broader commodity complex, measured by the Bloomberg Commodity Index, has rallied alongside oil.
In this market environment, investors are increasingly turning toward diversification strategies, including different regional equity exposures, allocations to gold, safe-haven currencies and defence-related stocks. However, if supply disruptions ease, markets could experience a rapid rebound even though other risks such as Trump’s threat of a 15% global tariff also need to be digested.
Colin Attard is Chief Investment Officer at Curmi & Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. The Energy Sector is not regulated by the MFSA. Curmi & Partners Ltd, with registered address Finance House, Princess Elizabeth Street, Ta Xbiex, Malta XBX 1102, is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.