US-Iran: Ongoing strikes heighten oil supply disruption concerns
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
What happened?
Global equities have continued to move lower as the conflict in the Middle East enters its seventh day, with further US-Israeli strikes across Iran and Iranian attacks on the region’s energy infrastructure.
Bahrain’s Ministry of Interior reported a missile strike at the country’s main Bapco refinery, which resulted in “limited material damage,” and Reuters reported that drones landed in Iraq's Rumaila oilfield. Reuters also reported that a Bahamas-flagged crude oil tanker anchored in Iraqi waters was targeted by an Iranian remote-controlled boat laden with explosives.
Iranian officials stated overnight they would be prepared to confront a potential US ground invasion. President Trump denied the US would undertake such an effort, but told reporters he would play a role in choosing Iran's next leader. Separately, US Defense Secretary Pete Hegseth suggested US strikes on Iran would soon ramp up, but that there was "no expansion" in US objectives.
Efforts are under way to restart maritime trade, but hundreds of ships remain stranded: President Trump announced plans for political risk insurance and guarantees to support maritime trade through the Gulf. Separately, Reuters reported China's government has sought safe passage from Iran for inbound cargoes of crude oil and LNG through the Strait of Hormuz.
In Thursday trade, the S&P 500 fell 0.6% and the tech-heavy Nasdaq dropped 0.3%. Energy, US IT, and consumer discretionary stocks ended higher, while industrials, materials, and consumer staples led declines. Oil prices rose on Thursday, with US crude rising over 8% to more than USD 80 per barrel, and Brent rising 5% to close above USD 85 per barrel. At the time of writing Brent is trading at USD 86.9/bbland S&P 500 futures are down 0.3%.
US natural gas prices have climbed about 5% since Sunday, while European gas prices have risen roughly 60%. Retail gasoline prices in the US have continued to rise, with the national average now USD 3.25 per gallon—up more than 30 cents since Sunday.
Fears of renewed inflation pushed Treasury yields higher: The 10-year yield rose above 4.1% and the 30-year yield reached 4.75%. Mortgage rates also ticked up, illustrating the broader impact of the conflict.
What do we expect from here?
We expect volatility to remain elevated in the near term as the conflict continues to disrupt markets and energy flows. Our base case is that the conflict will be relatively short-lived given the rapid degradation of Iranian military capabilities and US political incentives to avoid a prolonged period of higher energy prices ahead of the midterm elections.
The effective closure of the Strait of Hormuz has led to oil production being shut in, and production will increasingly be cut as storage becomes full. Qatar, the world’s second-largest LNG exporter, has halted production due to both the closure and attacks on energy facilities. These supply disruptions are a move toward our risk case scenario, but at present, just seven days into the conflict, they do not meet our criteria for a sustained disruption.
We do not see current levels of oil prices as a stable equilibrium. If shipping disruptions persist or infrastructure is further damaged, prices could move higher, potentially exceeding USD 90/bbl. But in our view, prices would need to remain elevated for several months before materially affecting growth or inflation. Conversely, if hostilities cease, oil prices are likely to moderate, with Brent crude eventually returning to the USD 60-70/bbl range.
Historically, equity markets tend to recover from geopolitical shocks once it becomes clear that the disruption is temporary and critical infrastructure remains intact. However, an important caveat to this optimistic message is that stocks tend to suffer when there is a prolonged disruption to energy supplies, which is what happened during the Yom Kippur War in 1973 (and the subsequent Arab oil embargo) and the Russian invasion of Ukraine in 2022.
How do we invest?
We believe one of the most effective ways of dealing with a more polarized geopolitical environment—which creates a wider range of potential risk scenarios—is to increase diversification.
Adequate exposure to quality fixed income and alternatives such as hedge funds can help reduce portfolio volatility and limit the impact of shocks. Investors should, of course, assess their ability and willingness to manage risks related to alternative investments.
We see further upside for broad commodities in 2026, driven primarily by our positive outlook for metals. The fast-moving nature of events in the Middle East increases the appeal of actively managed commodity strategies, in our view, given increased intra-commodity market volatility.
We also believe a modest allocation to gold, of up to a mid-single-digit percentage of total assets, can enhance diversification and buffer against geopolitical risks. Although the situation in the Middle East remains unpredictable—and a resumption of peace talks could lead to a temporary fall in prices—we believe that macroeconomic conditions favor the possibility of gold reaching USD 6,200/oz this year. Gold prices could be even further supported if sustained high oil prices result in weaker global growth prospects and/or stagflation