The coordinated U.S.–Israel strikes on Iran on February 28 and Iran’s subsequent retaliation, have pushed the region into its most volatile military confrontation in decades. With fighting still underway, commercial transit through the Strait of Hormuz has effectively ground to a halt, sending oil flows through the chokepoint to near zero.
Damage to energy infrastructure and rapidly filling storage tanks have forced several Gulf producers to curtail output. Most consequentially, QatarEnergy has shut down the Ras Laffan facility, which accounts for roughly 20% of global LNG supply. This represents the single largest disruption to energy supply in modern history.
Unsurprisingly, oil and gas markets have become the focus of investors. Crude prices, already trending higher on geopolitical risk, have climbed from around $51/bbl at the start of 2026 to above $100/bbl, briefly topping $120/bbl early this week.
Although President Trump has signaled optimism that the conflict could be short lived, the path forward remains highly uncertain. Ultimately, the economic impact will depend on how long shipping lanes through the Strait of Hormuz remain closed and how quickly oil and gas capacity can return after fighting subsides.
Equities
U.S. equities have shown notable resilience. Nine trading days into the conflict, the S&P 500 is down around 3% and sits less than 5% below its late January peak.
There are two dynamics that likely explain the muted move:
- Equity markets tend to discount geopolitical shocks given their historically short-lived impact on company earnings.
- Investors expect that President Trump has limited tolerance for a prolonged energy crisis that could derail his affordability agenda in a midterm election year.
International equities, however, have reacted far more sharply. Asian and European indices are down almost 8% (USD terms), reflecting their far higher sensitivity to energy prices and, in Asia’s case, to Middle East-linked LNG flows.
Rates and Central Banks
The most pronounced market reaction has been in rates. U.S. Treasury yields have risen as inflation concerns intensify and expectations for 2026 Fed rate cuts this year are pared back.
Moves in Europe have been even more pronounced. Bund yields have risen as markets price in ECB tightening this year, while UK gilt yields have surged as investors rapidly unwind expectations for 2026 rate cuts and begin pricing the risk of hikes.
U.S. Dollar
After a period of depreciation, the dollar has reasserted its safe haven role. Its recent outperformance reflects the U.S.’s relatively stronger macro position compared with major net energy importers such as Europe and Japan.
A sustained disruption in the Strait would represent a severe shock to global energy markets:
- LNG: Roughly 20–25% of global LNG exports pass through Hormuz, primarily from Qatar and the UAE, with about 80% destined for Asia. No meaningful pipeline alternatives exist.
- Oil: Around 30% of global seaborne oil supply transits the strait, sourced mainly from Saudi Arabia, Iraq, the UAE, Kuwait, Qatar, and Iran. Limited pipeline capacity means re routing would still leave global supply materially short, while much of the world’s spare capacity would also be inaccessible.
There are three near term constraints that are amplifying the shock:
- Commercial shipping through the Strait of Hormuz remains effectively frozen.
- Gulf producers have cut output as storage fills; restarting production can take weeks.
- Damage to infrastructure (due to Iranian attacks) implies further delays even after hostilities end.
There are mitigants, but they are modest relative to the scale. The G7’s 400-million-barrel release from Strategic Petroleum Reserves provides some relief but cannot fully offset an estimated 20mb daily supply loss. (Note: This is the largest coordinated SPR release on record and more than double the size of the drawdown that followed Russia’s invasion of Ukraine.) Following the announcement, oil prices continued to rise, underscoring both the scale of the disruption and the limited nature of buffers.
U.S. shale could help if prices remain elevated, though producers are unlikely to accelerate drilling unless the conflict looks prolonged. Additionally, while OPEC+ spare capacity can offer some buffer, storage constraints in the Gulf states sharply limit its near‑term effectiveness.
Ultimately, oil prices will depend almost entirely on when transit through the Strait of Hormuz resumes and how quickly productive capacity returns. A return to pre conflict price levels is far from assured.
The global economy appears capable of absorbing a modest, temporary rise in energy prices. U.S. growth remains robust, capital expenditure is strong, and household energy spending as a share of income is near historic lows. Furthermore, corporate profit margins also remain elevated, providing a buffer against higher input costs. Europe is seeing early signs of a recovery in growth, while Asia remains a key engine of global expansion, driven by AI‑related investment, resilient tech exports, and healthy domestic demand. Additionally, energy intensity has declined, reducing the likely economic impact of energy shocks compared with the 1970s.
But vulnerabilities persist. Inflation has eased but remains above central bank targets, and a sustained rise in oil prices would pressure consumers and likely delay rate cuts that had been anticipated at the beginning of the year.
Historically, oil price shocks have lowered growth and raised inflation. In the U.S., the drag on growth tends to be lagged and partially offset by higher energy investment, while inflation effects are more immediate and can propagate through broader cost channels.
Using a Federal Reserve Board model to quantify the effects of higher crude oil prices:
- Each $10/bbl increase in oil prices reduces GDP growth by 0.1ppt and raises headline inflation by 0.3ppt after four quarters.
- At higher price levels, oil price effects become increasingly non-linear, and risks to both growth and inflation widen.
It is also worth noting that, beyond energy, the Middle East plays a critical role in other inputs, including fertilizers (16% of global ammonia, urea, and nitrogen flows) and 25–35% of global helium, a key input in semiconductor manufacturing. As such, the growth impact of a more severe, prolonged conflict would extend beyond the oil price shock.
Given the unusually high uncertainty around both the duration of the conflict and the speed at which energy flows could normalize, it is helpful to anchor expectations around a set of plausible paths. The following scenarios map out how varying degrees of disruption to oil and LNG supply could shape U.S. growth, inflation dynamics, and policy rates, offering a sense of the thresholds at which macro conditions and market behavior could change materially.
Baseline scenario: A sharp but brief oil spike, lasting a few weeks, having negligible growth effects and lifting headline inflation by ~0.2ppt for a quarter, with little impact on core inflation and therefore Fed policy.
Medium adverse scenario: Oil stabilizing around $90/bbl for 2-3 months before only gradually declining would have a more significant impact on growth, yet would still be modest, reducing our full-year U.S. GDP growth forecast of 2.5% only slightly, given that an increase in energy capex would at least partially offset a weakening in consumer spending. On the other hand, core inflation (currently at 2.5%) would rise more significantly to around 3% by end-year, constraining the Fed’s ability to deliver the two rate cuts we currently expect.
Severe adverse scenario (tail risk): A multi‑quarter closure of the Strait of Hormuz could drive oil sustainably above $125/bbl and trigger wider supply chain risks, knocking around 0.5-1% off our 2.5% baseline forecast and pushing core inflation above 3.5% by year-end and potentially force the Fed to consider rate hikes.
Europe remains far more vulnerable than the U.S. to prolonged energy pressure. While direct Middle East exposure is below 2022 levels, European gas prices have nearly doubled since January. Growth risks are correspondingly higher.
Yet the regional impacts will likely be uneven. Energy-independent producers such as Norway and Sweden are better insulated, while Italy, Spain, and energy-intensive Germany are more exposed and face significantly greater downside.
Markets are still in the early stages of digesting the conflict, and pricing remains highly dependent on assumptions about how long it will last. So far, earnings expectations remain resilient, but a prolonged energy shock would begin to erode that foundation, negatively impacting risk assets with greater severity.
With signals mixed across asset classes and risks shifting rapidly, a few themes stand out for investors as the energy shock evolves.
Equities and bonds are telling different stories. Equity markets continue to price a short conflict with limited economic fallout, while bond markets are bracing for a longer lasting inflation shock. The eventual path will likely fall somewhere between the two interpretations
The definition of “severe” has shifted higher. Just weeks ago, $100/bbl for oil was considered a tail-risk scenario. Markets must now contend with the possibility that $130/bbl is the new threshold, yet equities have barely reacted, suggesting growing complacency.
Data noise is high. Investors are leaning on unreliable indicators, such as drone attack counts or informal shipping updates, which reinforce uncertainty about the duration of the conflict.
Technology continues to outperform. Alongside energy, tech is the only S&P 500 sector in positive territory this month. Despite rising input cost risks for key Asian semiconductor and memory chip manufacturers, investors see valuation opportunities following February’s tech correction and view the sector’s strong balance sheets as a buffer against macro headwinds.
Country and sector diversification remains critical. Historically, the U.S. outperformed during oil shocks due to its relative energy independence. Still, markets more levered to energy, defense, and inflation resilient sectors, such as Norway, Canada, Brazil, and Saudi Arabia, have often performed even better.
Ultimately, for investors, history argues against dramatic portfolio shifts in response to geopolitical events. In an increasingly fragmented global order, disciplined diversification—across regions, sectors, and assets such as gold, high quality bonds, selective commodities, and defense—remains one of the most effective ways to manage uncertainty while staying aligned with long term objectives.
Footnotes
Crude spiked above $120/bbl on Monday, March 9, during early European trading hours.
March 1, 2026 – March 12, 2026.
March 1, 2026 – March 12, 2026.
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