• Brent, WTI surged more than 10% since Israel’s initial attack on Iran
• Israel-Iran conflict extends for sixth day
• Trump threatens Iran leader

Middle East Tensions Escalate

Prior to Israel’s unexpected strike on Iran, investor sentiment toward oil prices remained relatively bearish, weighed down by ongoing concerns over the economic fallout from tariffs and the rapid production ramp-up by Saudi Arabia and its OPEC+ allies.

Israeli strikes on Iran’s nuclear and energy infrastructure last Friday, followed by retaliatory attacks by Iran on Israeli cities and refineries, mark a major escalation in Middle Eastern hostilities, driving crude prices sharply higher. For the global economy, the implications are serious as energy security, inflation, central bank policy, and global supply chains all face renewed pressure.

Israel Attacks Iran’s Nuclear and Energy Infrastructure

Unlike past confrontations that relied on proxy militias and cyber-warfare, the latest Israeli barrage has directly targeted vital nuclear and military sites killing top generals and scientists, as well as attacking oil and gas infrastructure. Israeli drones struck Iran’s South Pars gas field, one of the world’s largest, as well as a major oil depot near Tehran. Meanwhile, Iranian missiles struck key Israeli sites, including an oil refinery in Haifa and residential areas in Tel Aviv and Jerusalem.

The Israeli attack is part of broader strategy aiming to prevent Iran from building an atomic weapon and degrade Iran’s economic resilience by targeting economic and energy assets and deter further support for militant groups across the region.

The immediate result was a sharp and volatile reaction in oil markets raising fears that energy security is being used as a weapon of war.

Oil Prices Surge on Middle East Supply Risks

Following the initial Israeli strikes on Friday, Brent crude futures surged intra-day to $78.50 per barrel, while WTI rose 12% to a high of $74.63. This marks the sharpest gains in crude prices since Russia’s full-scale invasion of Ukraine in 2022. Prices temporarily pulled back on Monday as traders took profits, but geopolitical risk premiums remain elevated, and prices have re-gained momentum on Tuesday.

The key drivers behind the spike in oil prices are the uncertainty in oil supply as even short-term disruptions have the potential to impact global energy flows. At the same time, markets are pricing in a geopolitical risk premium amid growing concerns that the conflict could escalate into a broader regional confrontation. Adding to the volatility, Iran’s potential to block or disrupt the critical Strait of Hormuz have intensified concerns about the stability of oil shipments through this key chokepoint.

The Strait of Hormuz: Global Energy’s Achilles Heel

About one-fifth of global oil supply, or nearly 20 million barrels per day, flows through the Strait of Hormuz, which is a narrow sea passage between the Persian Gulf and the Gulf of Oman. Iran has repeatedly threatened to block it in the event of military escalation. However, so far, Iran is not signalling the closure of the Strait of Hormuz to global shipping.

The worst case-scenario for the oil market would be an attempt by Iran to block the Strait of Hormuz. While it is difficult to fully close the strait due to U.S. naval presence, Iran doesn’t need to block it entirely to cause disruption.

Tactical strikes on tankers, laying sea mines, or targeting shipping infrastructure could significantly raise shipping and insurance costs, effectively tightening supply without a formal blockade. While such a move appears unlikely at the moment as it will almost guarantee U.S. involvement in the conflict, it could easily send WTI oil prices above $100.

Source: TradingView

Impact on Major Oil Importers: Asia in the Firing Line

The unfolding crisis in the Middle East poses significant risks for major oil importers, with countries in South and Southeast Asia among the most exposed. India, which relies on the region for over 60% of its crude oil, is especially vulnerable due to its limited strategic reserves. Similarly, Indonesia, Pakistan, and Bangladesh face the dual challenge of disrupted supply and soaring import costs, compounded by weakening local currencies that make oil purchases even more expensive.

While China remains Iran’s largest oil customer, it is somewhat shielded from immediate shocks thanks to its diversified import sources, including Russian crude and substantial domestic reserves. Still, China is not entirely immune. Rising freight costs, fewer available tankers, and increased insurance premiums are likely to strain Chinese refiners, particularly if tensions escalate in the Strait of Hormuz and disrupt this vital maritime corridor.

Inflationary Pressures and Central Bank Dilemmas

A sustained oil shock of this nature has serious implications for global monetary policy. Central banks around the world have signalled a potential easing of rates in 2025; however, surging energy prices threaten to delay or even reverse those plans.

In the U.S., the Federal Reserve may need to stay longer on hold if headline inflation climbs due to higher fuel costs. Globally, emerging market central banks are at risk of facing stagflation where inflation rises even as growth slows.

For countries already facing high debt levels and current account deficits, a sustained period of oil prices at $90-$100 could trigger capital outflows, currency depreciation, and economic instability.

Strategic Petroleum Reserves and Emergency Response

The latest escalation and the potential of the conflict to extend for longer underscores the importance of strategic petroleum reserves (SPRs). Countries like the U.S., China, and Japan maintain sizable reserves to buffer against supply shocks. However, many emerging markets lack this cushion, leaving them at the mercy of price swings.

In the short term, IEA member countries could coordinate an emergency release of reserves as seen during past crises to stabilize prices. Yet if physical supply disruptions persist, even large SPRs may not be enough to offset the pressure.

G7: Stalled Diplomacy in the Shadow of War

At the diplomatic level, at the G7 Summit in Canada the international community has scrambled to contain the fallout. The G7 has expressed support for Israel while Germany and others called to de-escalate the crisis. U.S. President Donald Trump also expressed hope for a ceasefire and left the summit a day early due to the situation in the Middle East.

The G7 did not find a coherence over the conflicts between Russia and Ukraine and between Israel and Iran, with Trump showing support for President Vladimir Putin and calling for a broader de-escalation of hostilities in the Middle East. At the same time, Trump urged residents to immediately evacuate Tehran and stressed that Iran should have signed a nuclear deal with the U.S..

President Donald Trump issued a stark warning to Iran’s Supreme Leader, Ayatollah Ali Khamenei, describing him as “an easy target” and cautioning that American “patience is wearing thin.”

Trump’s remarks came shortly before a high-level meeting with his national security team on Tuesday afternoon. Simultaneously, the Pentagon began repositioning military assets to the Middle East, bolstering U.S. defensive capabilities in the region and broadening the range of strategic options available to the president.

Therefore, the likelihood of de-escalation in the near-term appear slim and the chances of a drawn-out conflict are growing.

Conclusion: Oil Markets Enter a Period of Elevated Risk

The Israel-Iran conflict has introduced a new phase of uncertainty into global oil markets, one where energy infrastructure itself has become a military target. Even if a full-scale war is avoided, the ripple effects of targeted strikes, retaliations, and shipping threats could keep the risk premium elevated for longer. With WTI oil around $73 and climbing, the risk of further volatility is high.

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