Middle East oil conflict risk pushes prices higher

Oil prices surged in early Asian trading Monday after Israel and Iran launched a new round of retaliatory attacks. Brent crude rose 2.3% to $75.93 per barrel, while WTI gained 2.2%, touching $74.60. This comes after both benchmarks closed last week up 7% and temporarily soared over 13% in intraday trading—their highest since January.

The market’s reaction reflects more than speculative heat. The exchange of fire between two key regional military powers raises credible fears of disruption to oil exports from the Middle East. With approximately 20% of the world’s oil—roughly 18 to 19 million barrels per day—passing through the Strait of Hormuz, any instability in the Gulf rapidly transmits into risk premiums across global energy markets.

This is not simply volatility. It’s a risk signal challenging the depth of available supply buffers and testing the real-time posture of sovereign producers.

Iran, a major OPEC member, currently produces about 3.3 million barrels per day and exports over 2 million. In theory, OPEC+—led by Saudi Arabia and including non-member Russia—has sufficient spare capacity to absorb a sudden Iranian supply shock. But in practice, that capacity is politically constrained and rarely deployed rapidly unless market stability mandates it.

Historically, Saudi Arabia has acted as swing producer, but only under conditions aligned with its fiscal and diplomatic calculus. To assume immediate compensatory pumping in response to conflict would misread the kingdom’s strategic posture. The willingness to act is contingent not only on price stability but also on geopolitical incentives—including the state of Saudi-Israeli normalization talks and Iran’s growing ties with China.

Thus, even if capacity exists on paper, its activation in crisis scenarios is never automatic. This is where nominal buffer and usable buffer diverge—and markets know it.

In addition to crude price spikes, institutional capital is beginning to reposition across commodities and defensive assets. Gold has climbed, while safe-haven flows into US Treasuries are absorbing renewed demand. FX markets remain tense: regional currencies such as the Israeli shekel and Iranian rial have faced pressure, while the dollar and yen have firmed in early trades.

The moves are familiar but notable. They suggest capital is not treating the conflict as an isolated flashpoint but as a potential escalation node capable of fracturing global supply networks—especially in a macro environment already shaped by disrupted Red Sea shipping lanes and constrained diesel inventories in Asia.

Calls for de-escalation from the US and Germany offer little near-term clarity. President Trump expressed hope for a ceasefire, though declined to confirm whether Washington had urged Israel to halt strikes. Germany’s Chancellor Merz called for G7 coordination, but no resolution emerged from the Canadian-hosted summit.

Meanwhile, Iran has indicated to Gulf mediators that it will not enter ceasefire negotiations while under Israeli attack. The signal here is deliberate: Tehran is prepared to leverage its regional proxy network and asymmetric naval capabilities unless Israel pulls back. This suggests prolonged instability—not a short burst of tactical aggression.

Nearly one-fifth of the world’s oil passes through the Strait of Hormuz daily. This includes not only Iranian exports but also crude from Iraq, Kuwait, and Qatar. While there has been investment in alternative routes—such as the UAE’s Fujairah bypass—the chokepoint remains a singular vulnerability in the global energy system.

The US Navy presence offers deterrence, but not invulnerability. Drone and missile technologies—already employed in past attacks on Saudi and Emirati infrastructure—make any prolonged conflict in the Gulf a material threat to commercial tankers and regional throughput reliability.

This isn't a theoretical scenario. It is a repeatable stress point in the global energy architecture.

The spike in oil prices is not just a commodity event—it is a systemic stress test. It forces policymakers, central banks, and sovereign wealth funds to reassess their assumptions around energy security, reserve adequacy, and exposure to Middle East transport risk.

While OPEC+ may technically match lost Iranian supply, the political willingness to do so quickly remains constrained. This introduces ambiguity into what used to be seen as a credible buffer. It also places renewed strategic weight on Gulf producers as not just market stabilizers, but geopolitical actors whose actions—or inactions—reverberate far beyond price curves.

This escalation is unlikely to shift central bank rate paths in isolation. But it will feed into inflation expectations, add noise to global trade flows, and challenge asset allocators to reweight their exposure to energy-linked markets and sovereign risk.

This is not just about barrels. It is about signaling, deterrence, and the bandwidth of policy response under stress.