Middle East conflicts have nearly paralyzed the Strait of Hormuz, and Brent crude oil is approaching $80 per barrel! The global economy is facing a new inflation shock.

Notice that as the first wave of impact of the Middle East war became evident, traffic in the Strait of Hormuz came to a near standstill, and the shutdown of a large refinery in Saudi Arabia disrupted the energy market, causing crude oil prices to soar. Brent crude oil futures closed up by about 6.7%, settling near $78 per barrel, marking the largest one-day increase since June 2025. According to state media reports, after a spokesperson for the Iranian Islamic Revolutionary Guard Corps stated that the country would not allow oil to leave the region, crude oil prices further expanded in after-hours trading. Diesel futures, representing the global economic engine, also closed at a nearly three-year high. As airstrikes entered their third day, the US sent conflicting messages about how long a war with Iran might last, with long-lasting conflict expected to further disrupt the energy market and possibly cripple vital waterways. President Trump stated that he anticipated the conflict to last four to five weeks but added that the US was prepared for a longer-term battle. Meanwhile, US Defense Secretary Pete Hegseth rejected the idea of an "endless" war. At the same time, Iran's security chief ruled out the possibility of negotiations. This war signals a dangerous new phase for the Middle East and global oil markets. With Iran producing about 3% of global output at approximately 3.3 million barrels per day, its strategic location along the Strait of Hormuz gives it significant influence over energy supplies. Oil from the Persian Gulf must pass through this waterway to reach major markets in China, India, and Japan. This crucial chokepoint carries one-fifth of the world's oil and an equal share of liquefied natural gas (LNG). Helima Croft, Head of Commodity Market Strategy at RBC Capital LLC, stated in a report, "In a scenario where the conflict persists, we expect oil prices to touch the $100 per barrel range. Energy is clearly now at the forefront of the Iran war." Following the attacks on Iran, oil prices spiked. JPMorgan estimated that a 25-day closure of the Strait of Hormuz would lead to oil-producing countries reaching full storage capacity and being forced to cut production. The insurance market is already studying how to price the related risks intensively. The surge in energy costs, if sustained, could increase global inflation pressures. This will complicate the tasks of central banks, including the Federal Reserve, as they try to control the rate of price increases while supporting economic growth. US Secretary of State Mike Pompeo stated that plans to mitigate the fluctuation in energy costs due to the war with Iran would be implemented starting on Tuesday. In one of the first major impacts on physical oil assets, Saudi Aramco halted operations at the Ras Tanura refinery after drone attacks in the region, further driving up fuel prices. Crude oil flows continue in nearby ports. In Europe, liquefied natural gas prices soared on Monday after Qatar halted production at the world's largest export facility following Iranian drone attacks. An American oil tanker participating in a military fuel supply program was hit in the region, with at least four ships becoming targets on Sunday. The threat level was described as "extremely high" by naval forces, prompting many shipowners to stop passage. Meanwhile, Trump stated that US forces "destroyed" ten Iranian naval vessels. The provider of major Middle East oil benchmark prices stated that they would not accept bids and offers for certain grades of crude oil in the Strait of Hormuz, underscoring how the conflict has disrupted crucial oil pricing for the world's largest oil benchmarks. The war officially broke out on Saturday, with the US and Israel launching missiles at targets across Iran, while urging the local population to overthrow the Islamic regime. Tehran, in turn, carried out multiple attacks on Israeli as well as American bases in Saudi Arabia, Qatar, the UAE, Kuwait, and Bahrain. While the increase in oil prices is the largest since early 2022, the future path remains uncertain. One reason for the lack of a larger rebound in oil prices is that the oil market has relatively ample supply over the past year or so. Other supply risks emerged on Monday when a key oil terminal in Russia ceased loading after drone attacks in Ukraine. In response to the escalating conflict, OPEC+ agreed at a pre-arranged weekend meeting to increase quotas by 206,000 barrels per day next month. The organization, which includes Iran, Saudi Arabia, and Russia, was expected to resume slight production increases before the outbreak of hostilities. Monday's surge pushed oil prices up by about 30% so far this year, while the cost of transporting crude oil from the Middle East to China reached historical highs. Traders have been preparing for the threat of a conflict between the US and Iran since the beginning of the year. Approximately one-fifth of the world's oil flows through the Strait of Hormuz. Analysts at Citigroup, including Max Leyton, stated in a report before Monday's opening, "In our base scenario, we expect Brent crude oil prices to fluctuate between $80 and $90 per barrel at least in the coming week." They added, "Our core assumption is that there will be a change in leadership in Iran or enough change in the regime to stop the war within one to two weeks; or the US will decide to de-escalate the situation after seeing a change in leadership and at the same time thwarting Iran's missile and nuclear programs." Meanwhile, Morgan Stanley raised its second-quarter estimate for Brent crude oil prices from $62.50 to $80 per barrel. Commodity Trading Advisors (CTAs) have also joined the upward trend, amplifying the momentum. According to data from the Bridgeton Research Group, algorithmic traders currently hold 82% of long positions in Brent crude oil and West Texas Intermediate (WTI), with some buy-side positions on the far-end curve.