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The military intervention in Iran is heating up the oil market
A new major escalation in the Middle East is disrupting the geopolitical balance and shaking international markets, particularly the oil market, which is reacting sharply to the closure of the Strait of Hormuz, with Brent crude now pointing above 77 USD.
Amid military retaliation, oil market tensions and increased financial volatility, here is what you need to know to understand the stakes of this crisis.
Introduction
- Over the weekend, Israeli and U.S. military forces carried out strikes against Iran, killing several senior Iranian officials, including Supreme Leader Ali Khamenei. Iran retaliated by attacking U.S. interests in the region, causing significant collateral damage and civilian casualties in Gulf countries, and by closing the Strait of Hormuz — a strategic transit route for regional oil and gas exports. This is an unprecedented move, even at the height of the Iran–Iraq war in the 1980s!
- In this context, oil prices, which had already risen last week to around USD 72 per barrel, are increasing sharply today, with Brent crude trading above USD 77. Heightened tensions are driving capital flows toward safe-haven assets: gold has reached new highs above USD 5,360 per ounce, the yield on 10-year U.S. Treasuries has fallen back below 4%, and the U.S. dollar has regained some strength. By contrast, equity market volatility — particularly in Gulf countries — is expected to intensify.
- Will this military operation prove more successful than the one conducted in June 2025, which lasted 12 days? Only time will tell. One thing seems increasingly clear, however: this intervention is likely to be prolonged, as Washington now appears determined to achieve its full range of military and political objectives, including more maximalist goals such as regime change.
- While the impact of this conflict on the global economy and financial markets remains uncertain at this stage and will depend on the duration and intensity of the war, the analysis below aims to provide some clarity.
Preventing Iran from acquiring nuclear weapons and pursuing regime change
- Since the beginning of the year, following the violent repression of protests against the Iranian regime — resulting in several thousand deaths — diplomatic and military pressure on Iran has continued to intensify.
- The United States has deployed two aircraft carriers and their escort groups to the region, while the European Union has designated Iran’s Revolutionary Guards as a terrorist organization.
- At the same time, Iran and the United States engaged in intensive diplomatic discussions in Oman and Geneva, notably aimed at curbing Iran’s nuclear and military ambitions. These talks ultimately failed, prompting the United States and Israel to resort to strikes on Iranian territory over the weekend.
- While the duration of the intervention remains uncertain, it is reasonable to assume that it will be prolonged. In June 2025, twelve days of intensive Israeli and U.S. bombardments appear to have failed to achieve their objectives. Moreover, the United States now seems to be pursuing the more maximalist option of regime change in Iran, which will clearly require more time than merely containing the country’s nuclear ambitions.
- In this context, the death of Ali Khamenei is likely only the first step in a difficult political transition process in a country of nearly 90 million people, governed since 1979 by a theocratic regime that controls all levels of power and large parts of the economy.
- Each escalation in the Middle East inevitably recalls the oil crises of the 1970s, which had a profound impact on the global economy and financial markets. However, today’s situation is fundamentally different.
Impact on the global economy and oil markets
- The global economy is entering this crisis from a relatively solid position, despite existing commercial and geopolitical tensions.
- The IMF currently forecasts global economic growth of 3.3%, in line with long-term potential. These expectations have so far been confirmed by leading economic indicators, such as purchasing managers’ indices, which even suggest a slight acceleration in growth.
- At the same time, inflation — which surged following Russia’s invasion of Ukraine in 2022 — is normalizing in Western economies. Inflation currently stands at 2.4% in the United States and 1.7% in Europe, levels close to or below the 2% targets of the U.S. Federal Reserve and the European Central Bank. Inflation therefore remains contained for now. The Fed is expected to cut its policy rate twice this year, while the ECB should maintain an accommodative monetary stance.
- Nevertheless, fears that the conflict could spread to a region accounting for 20–25% of global LNG and oil trade, and the closure of the Strait of Hormuz, have triggered a sharp reaction in oil prices.
- Brent crude, which was trading around USD 59 per barrel in mid-December, rose gradually amid intensifying U.S. pressure to exceed USD 70 last week. Following the outbreak of hostilities, it is now trading above USD 77.
- If Iran were to succeed in durably blocking tanker traffic through the Strait of Hormuz — through which nearly 20 million barrels of crude oil transit daily — and/or damaging production facilities in other Gulf countries, oil prices could temporarily exceed USD 100 per barrel.
- However, given the balance of forces in the region, a prolonged closure of the Strait of Hormuz appears unlikely at this stage, as the U.S. military and its allies would almost certainly enforce freedom of navigation. Even so, maritime traffic would likely become less fluid and more costly, particularly due to higher insurance premiums, maintaining a higher risk premium — currently estimated at around USD 15 — in oil prices.
- Moreover, the recent surge in oil prices could prove temporary, as was the case last June. Until recently, oil prices had been on a downward trend, with markets very well supplied. A production surplus of more than 3.5 million barrels per day is expected this year.
- In addition, OPEC holds substantial spare capacity — around 5 million barrels per day — which should be sufficient to offset a potential loss of Iranian exports (approximately 1.5 million barrels per day), provided the conflict does not escalate further and the Strait of Hormuz is not durably closed.
- The current situation is also fundamentally different from that of the 1970s. At that time, oil accounted for nearly 50% of global primary energy consumption, and the Middle East was the dominant producer. Today, the energy mix is far more diversified, notably due to nuclear power and renewable energy. Oil now represents less than 30% of global primary energy production, and supply is much more diversified, with the United States having shifted from being the world’s largest consumer to its largest producer.
- As a result, the economic consequences of the current conflict should be significantly more limited than those of the 1970s. At that time, oil prices rose by 1,500% over a decade, triggering a deep recession and an inflationary shock that prompted aggressive interest rate hikes in the early 1980s under Federal Reserve Chairman Paul Volcker.
Impact on financial markets
- We are entering a period of heightened uncertainty that is likely to fuel volatility in oil and financial markets for some time, especially as these geopolitical tensions add to an already fragile environment shaped by recent existential questions surrounding the impact of artificial intelligence on our economies and businesses.
- In this context, equity markets are likely to remain under pressure, while bond markets and gold should provide valuable diversification.
- It is therefore advisable to remain cautious in the short term, while staying invested, diversified, and attentive to opportunities that may emerge once the situation stabilizes.
- Above all, investors should avoid panic. Historically, despite short-term spikes in volatility, geopolitical events of this nature have tended to have only a limited and temporary impact on financial markets. For example, following the two Gulf Wars, a diversified portfolio outperformed cash by an average of 13.5% after one year and 28.6% after three years.
What about investment strategy?
- Given an already challenging geopolitical environment at the start of the year, ING’s fund managers had, for several weeks, been protecting portfolios by overweighting, in particular, precious metals such as gold.
- In addition, due to the disruption of many sectors — notably software, which has declined by nearly 20% (in EUR) since the beginning of the year amid advances in artificial intelligence — as well as trade uncertainties, elevated equity valuations, and low equity risk premiums, they also maintained a neutral allocation to equities.
- From a sectoral perspective, they ensured a balanced exposure between growth sectors, such as technology, and defensive sectors, such as healthcare, thereby enhancing portfolio resilience.
- ING nonetheless remains confident in the outlook for financial markets. Once geopolitical tensions ease, current turbulence could create attractive buying opportunities.
- Indeed, beyond geopolitical stress, it is important to recall that the economy and risk assets should continue to be supported not only by the expansion of artificial intelligence (AI), but also by more accommodative fiscal, monetary, and regulatory policies.
- Optimism surrounding the deployment of AI remains strong and underpins earnings growth expectations for 2026: analysts expect profits at major global companies to rise by an average of 14%, with a particularly strong contribution from AI-related companies (+32%).
- Risk assets are also supported by accommodative monetary policy: since mid-2024, major central banks have reduced policy rates by 1.6%, a pace rarely observed outside recessionary periods.