Middle East tensions push energy prices up: what it means for investors

Failure to agree on a new nuclear deal — after months of intensive but ultimately stalled negotiations in Muscat and Geneva — has now spiraled into a full‑blown military conflict between the United States/Israel and Iran, dragging other regional economies into turmoil too.

After coordinated US‑Israeli airstrikes aimed at degrading Iran’s leadership and nuclear infrastructure, Iran has launched hundreds of missile and drone attacks on energy facilities and strategic targets across Israel and the Gulf, including in Qatar, Saudi Arabia, Kuwait and the United Arab Emirates, where civilian sites in Dubai and Abu Dhabi were struck and oil infrastructure disrupted.

The Strait of Hormuz is closed for maritime traffic.

Strait of Hormuz is a major chokepoint for global maritime traffic.

Iran controls the northern bank of the Strait, a critical passage for carriers transporting crude oil and natural gas from the energy-rich Middle East to global markets. The closure of the Strait threatens to disrupt flows on a massive scale.

In numbers:

• About 20% of global oil passes through the Strait,
• 45% of Middle East energy exports are destined for China,
• More than 80% of LNG exports head toward Asia, and
• Around 30% of Australian refined oil transits this route.

According to Al Jazeera, these developments could effectively remove up to 17 billion barrels of oil from the market — roughly 5.5 months of global crude demand.

• US crude opened Monday’s session with a more than 10% jump, retraced most gains on Monday but pushed up to $84 per barrel on Tuesday, while Brent crude rallied past the $80pb – highest since summer 2024.
• US natural gas prices were trading 10% higher on Tuesday, compared to the Friday’s February 27 close, while European nat gas futures were the most heavily impacted. News that Qatar shut down a gas production facility after being hit by an Iranian drone attack sent the TTF futures up by 50% in single move.

Volatility and fluctuations in oil and gas prices will certainly continue as Iran refuses to negotiate with the US, while US President Donald Trump says that the US will do ‘whatever it takes’ to reach their objectives in the military operation.

Consequently, high geopolitical tensions are set to inject further volatility in energy prices.

Note that the price volatility could be two sided: big upside moves could be followed by big pullbacks.

High volatility per se is a sign that tensions remain high – and suggests a further bullish development.  

The most important factor for global markets is not only the amplitude of the energy price spikes but also the duration.

Crude oil

A short-lived disruption can be absorbed through strategic petroleum reserve releases and existing commercial inventories. Global demand stands near 100 million barrels per day, while strategic reserves amount to roughly 1.2–1.5 billion barrels, meaning that disruption could be offset for a period. US shale — which accounts for about 60–70% of US oil production (which accounts for more than 10% of global oil supply) — could also help mitigate the impact.

But if Middle East flows — particularly through the Strait of Hormuz, which carries around 20% of global oil supply — were curtailed for weeks or months, the buffer would quickly thin.

Some analysts already take the opportunity to call for a price jump past the $100 per barrel in the continuation of the Middle East flare-up.

The latter would be a 30% rise from the actual levels, but would be 30% lower compared to the $130pb peak reached at the start of the Russia-Ukraine war.

Natural gas

For natural gas, the picture is equally worrying. Gas is harder to reroute because it relies heavily on pipelines or LNG infrastructure.

• LNG export capacity is limited and cannot be expanded quickly.
• Storage capacity varies significantly by region (Europe has meaningful storage; many Asian countries much less).

But this year, European natural gas storage levels are unusually low for the end of the winter withdrawal season — around 30 % of capacity on average, one of the lowest readings for this time of year. Data from Gas Infrastructure Europe shows total EU storage at about 29% full as of Feb. 28 (significantly below typical seasonal levels) with major markets like Germany at ~20-21 % and France ~21 %, while some countries like Italy are higher at ~47 %.

These low inventories mean Europe has a much smaller buffer going into the injection season than usual, increasing vulnerability if LNG imports or pipeline flows are disrupted and complicating the race to refill stores ahead of next winter.

And since the Ukrainian war, Europe relies heavily on LNG imports from the US and Qatar. If LNG flows were disrupted while pipeline imports from Norway and North Africa remained stable, gas prices could spike higher – much higher.

At the start of the Ukrainian war, the TTF futures were trading more than 10 times the levels before the Middle East tensions started.

Given the geopolitical and strategic importance of the Iran operation, the short term outlook (weeks and up to 3 months) for oil and gas prices remains firmly bullish.

In the longer run (9-12 months), the prices could level out, leaving behind worldwide economic damages.

Higher energy prices have a notable impact on inflation. Energy typically makes up around 8–10% of Western CPI baskets.

During major shocks, it can account for up to one-third to one-half of headline inflation — with indirect effects amplifying the impact further.

Households

Rising energy prices act like an effective tax increase, reducing disposable income and squeezing budgets. Higher heating, electricity and fuel costs reduce spending on discretionary items, from retail and travel to entertainment, slowing consumer demand. Lower consumer confidence can exacerbate the contractionary effects on economic growth, particularly in energy-dependent regions of Europe and Asia.

Companies

Corporations also face rising costs. Energy-intensive industries — chemicals, metals, cement, shipping, manufacturing and data centers— see margins eroded. Companies may attempt to pass costs on to consumers, contributing further to inflation, but competitive pressures often limit this ability, leading to profit margin compression. This can weigh on earnings expectations, depress stock valuations, and increase equity market volatility.

Energy shocks also affect supply chains: if gas shortages trigger rationing, some factories may reduce production, delaying deliveries and amplifying global trade disruptions.

Central banks

Central banks are particularly sensitive to sustained energy price increases. Rising inflationary pressures challenge policymakers’ ability to cut interest rates, even if growth is slowing. For instance, the Federal Reserve (Fed) may have to maintain or even increase policy rates to prevent inflation expectations from de-anchoring, while the European Central Bank (ECB), Bank of England (BoE), and other global central banks may be forced into tightening cycles.

Higher interest rates, in turn, raise borrowing costs for households and businesses, dampening investment and spending, and potentially slowing GDP growth. The risk of stagflation — stagnant growth combined with high inflation — becomes more pronounced if energy shocks are prolonged.

Financial Markets

Energy price shocks influence financial markets.

• Bond yields tend to rise as central banks signal tighter policy, and risk premiums increase due to uncertainty around corporate earnings and economic growth.
• Equities, especially in sectors sensitive to input costs like consumer discretionary, transportation and manufacturing, may underperform. Conversely, energy producers, utilities and defense contractors may see gains, creating sectoral rotations in markets.
• FX markets are impacted too: currencies of energy-importing countries often weaken, while those of energy exporters strengthen, adding another layer of volatility to global trade and capital flows.

Geopolitically, rising energy prices can exacerbate tensions. Economies heavily dependent on imports — Europe, Japan, China and parts of Asia — may feel increasing pressure to secure energy supplies, influencing foreign policy decisions. Energy-exporting nations may enjoy windfall revenues, strengthening their geopolitical leverage and fiscal positions, but also contributing to inflationary pressures in importing countries.

The content in this article is provided for educational purposes only. It does not constitute investment advise, financial recommendations, or promotional material.