The conflict in the Middle East is evolving rapidly. According to experts from international asset managers, the closure of the Strait of Hormuz would lead to a scenario with higher upside inflation risks and a likely negative impact on global growth. For now, what we are seeing is that markets, in general, have been adjusting to elevated uncertainty rather than suffering dislocations.
Specifically, oil and natural gas prices surged on Monday. Brent futures rose about 9% to trade around $79 per barrel, while WTI, the U.S. benchmark, advanced nearly 8% to $73 per barrel on Monday morning. In addition, in Europe, natural gas prices climbed 40%, given the region’s high dependence on LNG shipments from the Middle East.
“U.S. equities initially fell by around 1%, but later recovered and closed almost flat, while European markets dropped more than 2% due to their greater energy dependence on the Middle East. U.S. Treasury bonds have experienced significant selling due to inflation concerns associated with the surge in oil prices,” summarize analysts at Maximai Investment Partners.
In the view of Raphael Thuïn, Head of Capital Markets Strategies at Tikehau Capital, market behavior suggests that U.S. intervention on Iranian soil had been partially anticipated by investors. “While the possibility of a more prolonged conflict cannot be ruled out and uncertainty remains significant, several factors are currently moderating the risk of a more sustained escalation,” he notes.
The Importance of Hormuz
To understand this scenario, it is necessary to step back and consider what the closure of the Strait of Hormuz would mean. Approximately 20 million barrels of oil per day and nearly one-fifth of the world’s LNG supply pass through Hormuz. Therefore, if the strait remains blocked for a significant period of time, the consequences for prices will be non-linear.
“A partial slowdown lasting one or two weeks can be absorbed through inventory drawdowns and delayed shipments. A total or near-total closure lasting a month or more would require demand destruction at levels that could push crude oil into triple-digit prices and European natural gas prices toward or above the crisis levels seen in 2022. The relationship between the duration of the disruption and prices is not proportional—it accelerates. Each additional week of closure worsens the problem, as storage reserves are depleted, refinery production cuts occur, and it takes time to mobilize replacement cargoes from outside the region,” explains Hakan Kaya, Senior Portfolio Manager at Neuberger Berman.
For Jack Janasiewicz, Portfolio Manager at Natixis IM Solutions, the situation remains uncertain and the key factor will be the duration and scope of the disruption in the oil supply chain. “The longer this situation persists, the greater the probability of a prolonged rise in oil prices. However, we see few indications that this will happen. The government has little interest in prolonging the conflict,” he acknowledges.
Natural gas deserves special mention, as its prices have surged despite minimal damage to energy infrastructure and despite the natural gas market entering the spring season. According to Norbert Rücker, Head of Economics and Next Generation Research at Julius Baer, news about the shutdown of Qatar’s main liquefaction and export plant, along with preventive production cuts in the Middle East, fueled fears about energy supply security, mainly in Europe and Asia.
“Qatar is among the three largest suppliers of seaborne natural gas, and a prolonged disruption would be truly concerning. We do not know what portion of the facility remains offline, but the drone attack apparently did not cause significant damage. This, among other factors, helps explain the surprisingly contained reaction of oil prices to the events in the Middle East,” he explains.
Beyond Oil
In his view, the natural gas market appears more vulnerable to attacks in the Middle East, given that supply comes from a smaller number of facilities. “Historically, natural gas has also been a more nervous, emotional, and volatile energy market than oil. Memories of the energy crisis remain fresh. However, the broader picture of a wave of LNG (liquefied natural gas) putting downward pressure on prices remains intact, even though it is currently overshadowed by geopolitics. It is unlikely that the surge in natural gas will translate into higher electricity prices in Europe,” adds Rücker.
Beyond oil and gas, roughly 15% of global maritime trade and 30% of container traffic that passes through the Red Sea toward the Suez Canal are also at risk. In this regard, Mohammed Elmi, Senior Portfolio Manager for Emerging Market Debt at Federated Hermes, believes that a significant disruption, such as the one seen during last year’s Houthi attacks, could weigh on global growth and reinforce stagflationary pressures.
“Beyond oil, the Gulf’s energy advantage supports large-scale nitrogen fertilizer production, accounting for about 10% of global supply and serving key markets such as India and Africa. Disruptions could push soft commodity prices higher,” he adds.
Economies That Would “Suffer”
As Elmi notes, historically instability has often benefited GCC (Gulf Cooperation Council, Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman, Bahrain) economies due to rising oil prices.
“The key will be how markets balance higher crude prices with rising regional risk premiums. If the conflict drags on, Middle East risk premiums could adjust significantly. Spillover to emerging markets outside the Middle East appears limited, although second-round effects could put pressure on weaker regional economies such as Egypt, Pakistan, and potentially Turkey,” Elmi says.
Looking at the United States, according to Fed analysis, a sustained $10 per barrel increase in oil prices is estimated to add approximately between 0.2% and 0.4% to overall U.S. CPI inflation and slightly reduce GDP growth.
