Insights from the conflict
Conflict in the Middle East
On February 28, the United States and Israel launched a surprised attack on Iran, resulting in the deaths of Iranian Supreme Leader Ali Hosseini Khamenei and senior Iranian leaders and military officials. In response, Iran retaliated with attacks on nearby US military bases and the energy infrastructure of regional allies, while also halting oil and gas shipping through the Strait of Hormuz, all of which has inflamed tensions throughout the Middle East.
While the strategic objectives and end-goal of the US and Israeli operation remain unclear, we need to assess the short and medium-term geopolitical impacts on financial markets. We believe the major impact will be via energy prices, with the region being a major exporter of oil and liquefied natural gas (LNG). Brent crude oil prices jumped $10/bbl to just below $80/bbl on the first trading day since the war erupted, up almost $20/bbl since Iranian protests intensified in late January.
With around one-fifth of global LNG flows effectively halted, the disruption to global gas markets is enormous and without precedent. European spot gas prices jumped by more than 20 percent on Monday morning, reaching around €38/megawatt-hour (MWh) and then €48/MWh following the news of the attack on Qatar’s LNG facilities, which have been shut down. The destruction of Qatar’s LNG facilities would have a significant impact on global gas markets, as the country is currently the second-largest LNG exporter.
The U.S. Energy Independence Is Changing the Oil Playbook
The chart below illustrates a major structural shift in the U.S. energy market over the past two decades. In the mid-2000s, the U.S. was heavily reliant on imported oil, leaving the economy vulnerable to global supply shocks. However, the shale revolution – driven by advances in horizontal drilling and hydraulic fracturing – dramatically increased domestic production. As a result, U.S. imports have declined while exports have surged, pushing the country into net-exporter territory in recent years.
This shift has important economic implications. When oil prices rise, the U.S. economy is now partially cushioned because higher prices benefit domestic energy producers, investment, and employment. While energy price spikes can still pressure consumers and inflation, the U.S. is far less exposed than in previous decades when it depended heavily on foreign oil. As a net exporter, the U.S. is structurally more insulated from global oil shocks than it once was.
Oil Markets Facing an Unprecedented Supply Shock
Global oil markets are currently experiencing what may be the largest supply disruption in modern history. With the closure of the Strait of Hormuz, nearly 20 million barrels per day (b/d) of oil supply has effectively been removed from global trade routes – roughly one-fifth of global oil consumption.
Historically, major oil shocks have been far smaller. The 1978 Iranian Revolution disrupted about 5.5 million b/d, while the 1973 Yom Kippur War and the 1990 Iraq–Kuwait conflict each removed roughly 4–4.5 million b/d. Even the Russia–Ukraine war in 2022 affected only around 2 million b/d. What makes the current situation remarkable is scale: the potential disruption tied to Hormuz is roughly equivalent to the combined impact of the five largest oil supply shocks since the 1970s.
For context, during peak Covid lockdowns, an estimated 25–30% collapse in oil demand briefly sent spot prices into negative territory. Against that backdrop, it should not be surprising that a ~20% disruption to global supply has the potential to send oil prices spiralling higher as markets scramble to price an unprecedented shock.
What the Oil Curve Is Telling Us
The charts to the right compare the current crude oil spot price with the August futures contract. The wide gap between the two reflects what commodity traders call backwardation – in this case, an extreme form of it. Backwardation occurs when near-term oil prices trade well above longer-dated futures, signalling that the market is placing a premium on immediate supply.
In these situations, the market effectively pulls oil out of storage and into the spot market, because selling oil today becomes more profitable than storing it. Historically, when the spread between spot prices and the 12-month futures contract exceeds 8%, oil prices have often peaked soon after. In most of those cases, prices were lower six months later.
Today’s market shows similar characteristics. The front-month price of Brent has surged well above contracts just a few months out, pushing the spread to unusually high levels. For markets to stabilize, this spread needs to narrow. Ideally, that happens because near-term prices fall, not because longer-dated contracts rise. If longer-dated prices rise instead, it may signal that the current risk premium is becoming embedded in the market rather than fading.
In short, the oil market is sending a clear signal: tight supply today is driving prices higher, but historically these extreme conditions rarely last.
Inflation was under control outside of an oil shock.
People often criticize this chart, but what’s striking is that it now shows a second shock emerging in both cycles. In the 1970s, the second shock came with the Iranian Revolution, which disrupted global oil supply and sent prices sharply higher after the initial 1973 oil crisis.
Today, tensions involving Iran and the Strait of Hormuz once again appear closely tied to the latest surge in oil prices. History suggests these episodes tend to evolve in stages. The first phase is typically an inflation trade, where energy prices surge and inflation expectations rise. But if the shock persists long enough, it can begin to slow economic activity, shifting the market narrative.
One signal to watch is the relationship between oil and bonds. If oil remains elevated but bond yields begin falling, it may indicate markets are moving from pricing inflation risk to pricing growth and recession risk- a dynamic that has often marked the later stages of past oil shocks.
Fragility in global supply chains
Everyone is focused on oil, but the bigger risk may be second-order supply chain shocks. About 38% of the world’s helium comes from Qatar, and most of it normally leaves the Gulf through the Strait of Hormuz. Helium isn’t trivial – it’s critical in semiconductor fabs for cooling and stabilizing chip-manufacturing equipment, meaning disruptions could ripple into the AI chip supply chain powering companies like TSMC, Nvidia, and AMD.
At the same time, another fragile link sits elsewhere: hydrogen bromide, a key gas used to etch silicon during semiconductor fabrication. South Korea’s chip industry – home to Samsung and SK Hynix – relies heavily on imports of bromine and related chemicals from Israel, a region already embroiled in war.
Oil shocks grab headlines. But modern supply chains are interconnected: choke points in shipping lanes or specialty chemicals can quietly threaten chips, AI infrastructure, and global tech production long before the oil shock itself hits the real economy.
Warfare is changing
Recent reports suggest Iran’s ability to sustain large missile barrages may be weakening as the conflict continues. Early in the fighting, Iran launched hundreds of missiles and drones, but the volume of ballistic missile attacks has fallen sharply in recent days. Analysts attribute this to a combination of destroyed launch infrastructure and the rapid targeting of launch sites. U.S. and Israeli officials say strikes have neutralized a majority of Iran’s missile launchers, with some estimates suggesting over 60% have been destroyed, limiting the country’s ability to fire large salvos even if missiles remain available.
At the same time, modern targeting technology is changing the battlefield. Military analysts say AI-enabled systems are helping identify launch sites more quickly by analyzing satellite imagery, radar data, and other signals, significantly shortening the time between detection and strike. For markets, the key takeaway is that the intensity of attacks – and therefore geopolitical risk – may increasingly depend on how quickly launch capabilities can be rebuilt or further degraded, rather than on missile inventories alone.
How do stocks do after major events
Periods of geopolitical tension can feel unsettling for investors, but history offers some helpful perspective. Looking back at major global shocks since World War II – from wars and terrorist attacks to financial crises – US markets have generally proved resilient.
While returns in the immediate aftermath can be mixed, the longer-term trend has been encouraging: the S&P 500 has delivered a median gain of about 5.3% six months after major events and 7.4% after a year.
In fact, markets have been higher roughly two-thirds of the time within a year of these shocks. It’s a good reminder that even though each crisis feels unique and worrying in the moment, markets have historically moved from the bottom left to the top right over time. Staying invested and focusing on the long-term has consistently proved more rewarding than reacting to short-term uncertainty.
Concluding thoughts
Taken together, these developments highlight how complex and interconnected this conflict has become for markets. The immediate focus has been on the oil shock – potentially the largest supply disruption in modern history – and the extreme backwardation signalling an urgent scramble for physical barrels. But history reminds us that energy shocks rarely stay confined to oil alone.
Supply chains, shipping routes, and critical inputs tied to technology and industry can all be affected in ways that take time to emerge. At the same time, markets are constantly reassessing the trajectory of the conflict itself: whether supply disruptions worsen, stabilize, or begin to reverse. For now, the story remains one of uncertainty. The key question for investors is not only how high oil prices can go, but whether the shock ultimately feeds inflation – or begins to weigh on global growth.
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