Global conflicts and their market impact - The Iran War and Oil

March 20, 2003 - Iraq. February 28, 2026 - Iran. 23 years and almost 900km separate these two but the similarities abound.

After the toppling of Ayatollah Ali Khamenei by a US-led coalition for ostensibly humanitarian reasons, the energy markets have once again been thrust to the forefront of global macroeconomics. The effects of the escalating conflict involving Iran, due to conclude by September 2026, are sure to reverberate throught the world's most critical commodity markets. Oil prices have been historically sensitive to geopolitical instability in the Middle East, and this conflict has not broken that trend as the immediate supply risks and longer-term regional uncertainty is still being priced.

The strategic importance of Iran to the global energy system cannot be overstated. The country itself produces roughly 4% of the global oil supply, while its geographic position along the Strait of Hormuz is of great importance also. The strait is a narrow chokepoint through which around 20% of the world's oil and LNG shipment passes. Threats to this corridor as we have seen - there have been closures and blockades since the start of the war - immediately raises risks over the reliability of global energy flows.

Even in situations where physical supply remains unchanged, markets respond rapidly to the perceived risk of disruption. Global markets have already begun to price in this perceived risk with crude oil prices surging, rising by more than 25% and pushing Brent crude oil above $90 per barrel, the highest level since the previous Middle East crisis in 2022. Disrupted shipping routes, damaged infrastructure, and reduced production and export all introduce a substantial risk premium into insurance which undoubtedly bleeds into the wholesale energy price.

Beyond Iran itself, the broader Middle East energy network amplifies the market impact. Missile and drone strikes targeting civilian infrastructure, energy infrastructure, and major transport networks including major refineries in Saudi Arabia, highlight how quickly regional tensions can translate into real supply risks for global markets. At the same time, precautionary production cuts and shipping disruptions among neighboring countries have further intensified concerns over global supply availability.

The result is a classic dynamic in commodity markets: geopolitical uncertainty transforms into price volatility. For traders, policymakers, and investors alike, the evolving conflict raises a crucial question - whether the current surge in oil prices represents a temporary risk premium driven by short-term uncertainty, or the beginning of a more sustained structural shift in global energy markets.

Pricing Geopolitical Risk in Oil Futures

Oil prices are not determined solely by current supply and demand conditions; they are largely shaped by expectations embedded within the futures market. Futures contracts allow market participants to buy or sell oil at predetermined prices for delivery at a later date. When geopolitical tensions rise, market participants begin reassessing the probability that supply may become constrained in the future.

In practical terms, this process introduces a geopolitical risk premium. Traders and institutions incorporate the potential for supply disruption into their pricing models. As a result, futures contracts begin trading at higher prices even before any measurable shortage occurs.

Speculative positioning also plays a major role. Hedge funds, commodity trading advisors, and energy-focused institutional investors often increase long exposure to crude oil during periods of geopolitical instability, anticipating that prices will rise if the conflict continues or escalates. Simultaneously, airlines, refiners, and other industrial consumers may rush to hedge against future fuel costs by purchasing more barrels now, further pushing futures prices higher.

The futures curve itself often reflects these expectations. In times of acute geopolitical risk, oil markets can shift into backwardation, where near-term contracts trade at a premium to longer-dated ones. This structure indicates that market participants expect immediate supply tightness and are willing to pay more for oil delivered in the short term.

A View of the Future

Beyond the geopolitical and economic implications, the question of political change in Iran ultimately centres on the lives of the Persian people themselves. For many, the possibility of regime change represents hope for greater political freedom, expanded civil liberties, and improved economic opportunities after nearly 5 decades of oppression and political instability. While any political transition carries uncertainty and challenges, the prospect of a system that better reflects the aspirations of its people offers the potential for more flourishing.