Iran tensions: oil and energy market implications

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The Middle East region produces a significant portion of the world's crude oil and natural gas, with major producers including Saudi Arabia, UAE, Iraq, Kuwait, Qatar, and Iran. The region's strategic importance stems from its massive hydrocarbon reserves, low-cost production, and concentration of export infrastructure through key maritime routes. Any disruption to Middle East energy flows has immediate implications for global oil prices, LNG markets, refining operations, and energy security across importing nations.

The Strait of Hormuz is a narrow maritime passage connecting the Persian Gulf to international waters. It serves as the primary export route for crude oil, condensate, refined petroleum products, and liquefied natural gas from major Gulf producers. The strait is considered one of the world's most critical energy chokepoints. Disruptions to shipping through this waterway can trigger supply shortages, insurance market reactions, freight rate increases, and energy price volatility across global markets.

Geopolitical tensions in the Middle East introduce supply risk premiums into oil markets. During periods of heightened conflict, traders anticipate potential production disruptions, export route closures, or infrastructure damage. This uncertainty drives oil price volatility and can result in sustained price increases. The magnitude of price impact depends on the severity of disruptions, availability of alternative supply sources, effectiveness of strategic reserve releases, and demand-side responses to higher energy costs. Historical precedents show conflicts can drive dramatic price increases when actual or anticipated supply losses are significant.

Middle East conflicts can significantly impact liquefied natural gas (LNG) supply chains, particularly exports from Qatar, a major global LNG producer. Disruptions create market tightness, intensify competition between Asian and European buyers, and pressure natural gas prices upward. Additional factors include potential impacts to regional pipeline gas flows, precautionary production shutdowns at offshore fields, and constraints on LNG shipping routes. European gas storage levels, Asian demand patterns, and seasonal weather conditions all influence how quickly markets respond to supply disruptions.

Relations between Iran and the United States have escalated into direct military conflict. On 28 February, the US and Israel launched attacks on Iranian government, military and nuclear targets, killing Iran’s Supreme Leader Ayatollah Al-Khamenei and several senior leaders of the Iranian Defence Council. Iran retaliated with missile and drone strikes targeting Israel and US military bases across the GCC region, resulting in civilian casualties and damage to infrastructure. The US has said it hopes for a swift resolution, and negotiations are understood to be beginning with Iran, mediated by Oman. However, Iran has declared “total war” on Israel and the United States, raising the risk of further escalation. 

The conflict poses a major risk to global energy markets because the Strait of Hormuz is a key route for oil and LNG exports. Around 15% of global oil supply flows through the Strait, and tanker traffic has effectively ceased after insurance coverage was withdrawn. The loss of these exports would significantly disrupt global markets and could push oil prices well above US$100 per barrel. In addition, around 81 Mt of LNG, nearly 20% of global supply, transits the Strait each year. Disruptions to these flows could dramatically tighten global gas markets and increase competition between Asia and Europe for available LNG cargoes.

An oil price shock caused by the conflict is expected to affect the petrochemical sector. Rising oil prices would weaken the value of feedstocks such as naphtha. Disruptions to Middle East exports and higher energy prices could therefore negatively impact petrochemical markets while increasing pressure across energy intensive industries.

Oil prices have increased because the conflict threatens exports from the Gulf region. Around 15 million barrels per day of crude and refined product exports pass through the Strait of Hormuz, and any prolonged disruption to this route would remove a significant volume of supply from global markets. Even if flows are restored quickly, it could take weeks for exports to return to normal. Market fears over potential supply losses have therefore increased the risk of a sharp rise in oil prices.