Trump-Iran Conflict: Oil Prices Surge as War Fears Escalate

City analysts and policymakers are bracing for potential disruption as escalating tensions between the US, Israel, and Iran raise the specter of attacks on the Strait of Hormuz, a critical chokepoint for global oil supplies. The possibility of a significant oil price surge is now front of mind for investors, particularly after strikes launched by the US and Israel across at least five Iranian cities, and subsequent retaliatory actions by Iran.

The situation took a sharp turn following the collapse of nuclear programme negotiations between the US and Iran in Switzerland this week. President Trump’s vocal support for regime change in Iran, including a direct appeal to the Iranian people to “take over your government” as reported by PBS, has further inflamed the situation. A state of emergency has been declared in Israel following Iranian counter-strikes.

The Strait of Hormuz: A Global Oil Lifeline

The Strait of Hormuz, a narrow waterway connecting the Persian Gulf to the Gulf of Oman and the Arabian Sea, is arguably the world’s most important oil transit chokepoint. According to the Bloomberg.com, roughly 20% of global oil and gas trade passes through this strategic passage. Any disruption, whether through military action or deliberate blockage, would have immediate and significant consequences for global energy markets.

Former Foreign Secretary David Lammy previously cautioned that obstructing the Strait of Hormuz would be a “catastrophic mistake,” recalling a period of heightened tensions last June when the US and Iran engaged in a 12-day standoff. The current escalation, still, appears considerably more serious.

Potential for a $100 Oil Price

Research indicates that a direct Iranian response to the recent airstrikes, specifically targeting the Strait of Hormuz, could propel oil prices to $100 per barrel. Currently, Brent crude oil is trading around $73. Capital Economics’ chief emerging markets economist, William Jackson, estimates that such a price increase could add up to 0.7 percentage points to global inflation. This would represent a substantial inflationary shock for major economies, including the UK.

Jackson further suggests that a prolonged conflict in the region could drive oil prices even higher. “A limited set of strikes could plausibly send oil towards $80 per barrel, while a longer conflict that causes disruptions to supply could send prices much higher – with a material effect on global inflation,” he stated. The political risk premium already factored into oil prices has risen substantially in response to the US military build-up in the region.

Investor Response: Gold and Defensive Stocks

As markets reopen on Monday, investors are expected to closely monitor movements in gold prices, major FTSE stocks, and energy prices. Susannah Streeter, chief investment strategist for Wealth Club, suggests that certain assets may offer a degree of resilience against market volatility. “For investors owning quality companies over the long term, big bumps in the road are part of the journey,” Streeter said. “Assets such as gold and more defensive stocks including utilities, healthcare firms, companies selling consumer staples and those with reliable, high‑yielding dividends, tend to be more resilient in eras of unpredictability.”

Gold, traditionally considered a safe-haven asset, is likely to notice increased demand as investors seek to protect their capital. Defensive stocks, representing companies providing essential goods and services, are as well expected to outperform in a risk-off environment. Recent performance of gold suggests a sensitivity to geopolitical events, though it has experienced volatility in recent months.

Impact on the UK Economy

The UK, a net importer of oil and gas, is particularly vulnerable to rising energy prices. An increase in oil prices would translate directly into higher costs for consumers at the pump and for businesses reliant on fuel. This could exacerbate existing inflationary pressures and potentially slow economic growth. The Bank of England would face a difficult balancing act, needing to weigh the risks of rising inflation against the need to support economic activity.

Beyond energy costs, a wider regional conflict could disrupt global supply chains, impacting various sectors of the UK economy. Increased uncertainty could also dampen business investment and consumer spending. The UK government has urged de-escalation, with a spokesperson calling for no “further escalation into a wider regional conflict.”

What Happens Next?

The immediate focus will be on whether Iran responds directly to the strikes and, if so, the nature and scale of its response. A limited, targeted response may be absorbed by the market with a relatively modest impact on oil prices. However, any action that threatens the flow of oil through the Strait of Hormuz would trigger a more significant price surge.

Diplomatic efforts to de-escalate the situation are likely to intensify, but the prospects for success appear limited given the current level of animosity. The US and Israel are expected to maintain a firm stance, while Iran is likely to seek to deter further attacks and reassert its regional influence. The situation remains highly fluid and unpredictable, with the potential for further escalation.

Looking ahead, investors should prepare for continued volatility in energy markets and a heightened level of geopolitical risk. Monitoring developments in the Strait of Hormuz and the broader region will be crucial for assessing the potential impact on global markets and the UK economy.