Views split between rapid retracement scenarios and sustained volatility if maritime risks persist
Energy markets across the globe are currently grappling with a period of intense volatility as analysts predict that oil prices will remain at elevated levels for the foreseeable future. This financial instability follows a dramatic escalation of geopolitical conflict in the Middle East, a region that serves as the heartbeat of global energy production. The primary focus for economists and energy traders alike is the status of the Strait of Hormuz, a critical maritime chokepoint that facilitates the movement of more than twenty percent of the world’s total oil supply. This narrow waterway, situated between Oman and Iran, connects the Arabian Gulf with the Gulf of Oman and the Arabian Sea, making it the most vital transit route for crude oil exports from major producers including Saudi Arabia, Iraq, the United Arab Emirates, and Kuwait.
Mathieu Racheter, Head of Equity Strategy Research at Julius Baer, notes that this situation has fundamentally altered market dynamics, stating: “The latest escalation between the U.S., Israel and Iran has injected a sizeable geopolitical risk premium into markets, primarily via the oil channel. While history suggests that such shocks are often short-lived for equities, elevated index levels increase near-term vulnerability. Political incentives ahead of the U.S. mid-term elections may argue against a protracted conflict, but uncertainty remains high. In this environment, discipline and a tilt towards defensive quality remain prudent.”
During Monday’s initial trading session, crude oil futures experienced a massive surge of more than eight percent, reaching price points not seen in several months. This aggressive market reaction was the direct result of the first trading opportunities following a series of high-stakes military actions. The United States and Israel launched coordinated attacks on Iran. In a swift and violent response, Tehran initiated retaliatory strikes targeting Israel and at least seven other nations in the region. Military analysts suggest that this direct confrontation marks a significant departure from previous shadow wars, pushing the region into uncharted territory and raising the specter of a broader regional conflict that could involve various proxy groups and international alliances.
The physical impact on energy infrastructure and logistics has been immediate and severe. Recent attacks have resulted in physical damage to several tankers, creating a hazardous environment for maritime commerce. In response to these security threats, a significant number of ship owners, major oil corporations, and global trading houses have officially suspended the shipment of crude oil, refined fuel, and liquefied natural gas (LNG) through the Strait of Hormuz.
Read more: Oil prices jump 6.4 percent to $77.57 as Middle East conflict sparks Strait of Hormuz supply fears
Norbert Rücker, Head Economics and Next Generation Research at Julius Baer, underscores the gravity of these disruptions, explaining: “Oil is a fever thermometer for geopolitics and reacts accordingly to the escalating conflict in the Middle East. Put simply, the implications of this conflict for the world economy depend on the flow of oil and gas through the Strait of Hormuz. The most feared scenario is not its closure, but serious damage to the region’s key oil and gas infrastructure. Over time, the risk of such a disruption seems to lessen.”
“Recognizing the dynamics and uncertainty of the situation, our base case is the usual pattern of a short-lived but more intense spike in oil and gas prices. Trade out of the Persian Gulf is likely to remain crippled for days or weeks, but this scenario does not threaten oil and gas supplies. We maintain our neutral view on oil, but revise the three-month price target upwards and upgrade our view on European gas prices to neutral. We will review this as the situation evolves.”
This suspension of traffic is particularly concerning for Asian economies, such as China, Japan, and South Korea, which rely heavily on Middle Eastern imports to fuel their industrial sectors and maintain national energy security. Financial institutions are now racing to calibrate their price forecasts based on the evolving security situation. Analysts at Citi have indicated that their base-case scenario sees Brent crude trading within a range of $80 to $90 per barrel over the next week. However, the bank also noted that should a diplomatic de-escalation occur, prices could potentially retreat to the $70 per barrel mark. While Citi remains cautious, other market observers point out that the exhaustion of diplomatic channels and the intensity of the recent military strikes make a rapid de-escalation increasingly unlikely in the short term.
As investors search for stability amidst this chaos, Carsten Menke, Head Next Generation Research at Julius Baer, observes a familiar pattern in the precious metals market: “The performance in perpetual futures over the weekend showed a very typical reaction of gold and silver to the escalation in the Middle East. It further fuels the bullish mood in the markets, but the restraint of indirectly involved countries and the limited risk of an oil crisis should cap the upside to prices. While providing stability to a portfolio at a time of heightened volatility in financial markets, the geopolitics playbook suggests that buying gold and silver on the day of a geopolitical escalation is unlikely to be a profitable strategy. We stick to our established views, Constructive on gold and Neutral on silver.”
Goldman Sachs has provided a quantitative look at the fear factor currently embedded in energy costs, estimating that there is currently an $18 per barrel real-time risk premium factored into crude prices. The bank’s economic models suggest that this premium might moderate to approximately $4 if the disruption is limited to only fifty percent of the flows through the Strait of Hormuz for a duration of one month. Nevertheless, the analysts at Goldman Sachs warned that oil prices could rise substantially higher if the global market begins to demand a premium to cover the risk of more permanent or persistent supply disruptions. The concept of a “risk premium” is essential for investors to understand, as it represents the additional cost buyers are willing to pay to secure supply amidst the threat of total scarcity.
Adding to the chorus of concern, Wood Mackenzie has warned that the price of oil could potentially exceed the $100 per barrel threshold if tanker flows through the Strait are not restored with urgency. According to WoodMac, the current situation has triggered a dual supply shock. This phenomenon occurs because the closure of the waterway does not only halt current exports but also renders the additional volumes promised by OPEC+ and the majority of OPEC’s spare capacity inaccessible. This spare capacity is traditionally the primary mechanism used to balance the global oil market during times of crisis, but it remains useless if the physical path to market is blocked. With the safety net of spare capacity effectively neutralized, the global economy is more vulnerable to price shocks than it has been in decades.
Parallel to these shifts in commodities, the fixed income sector is also undergoing a significant reassessment. Dario Messi, Head of Fixed Income Analyst at Julius Baer, highlights the shift in investor focus: “The tragic events in the Middle East create a difficult backdrop for market analysis. Investors will focus on U.S. Treasuries to reassess their safe‑haven characteristics, which have strengthened recently as structural headwinds eased and tailwind re-emerged. Although the oil shock raises inflation concerns, yields have shown reduced sensitivity to rising crude prices so far this year, particularly when driven by supply disruptions rather than demand. This could allow safe‑haven flows to dominate in the near term. Beyond the immediate turmoil, structural factors continue to support intermediate‑maturity exposure, while credit risk is best taken in shorter‑dated corporate bonds.”
In terms of production policy, OPEC+ had previously agreed to increase output by 206,000 barrels per day starting in April. However, the utility of this increase is now in question given the logistical bottlenecks. Market participants are closely watching for any emergency meetings from the cartel to address the crisis, though their ability to influence prices is currently limited by the physical blockade of the Strait. Meanwhile, analysts at Societe Generale provided a slightly different perspective on Monday, suggesting that the most probable outcome is a short-lived price spike. Their theory posits that the market will eventually undergo a partial retracement once investors believe that supply continuity can be credibly maintained through alternative routes or a stabilization of the maritime corridor.
Beyond the immediate price action, the global shipping industry is facing a massive spike in insurance costs. War risk premiums for vessels navigating the Middle East have skyrocketed, forcing some companies to re-route tankers around the Cape of Good Hope in South Africa. This alternative route adds thousands of miles and weeks of travel time to voyages, further tightening the global supply chain and increasing the carbon footprint of energy transportation. Furthermore, the International Energy Agency (IEA) has stated it is monitoring the situation closely and stands ready to advise member nations on the release of strategic petroleum reserves (SPR) should the supply crunch threaten global economic stability. The United States, which has utilized its SPR extensively in recent years, may face domestic political pressure regarding its ability to further cushion the market if this conflict persists throughout the 2026 calendar year.
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