Middle East Tensions Fuel Oil Price Surge, Highlighting Risks to Global Energy Supply
Oil markets reacted sharply this week to the sudden escalation in hostilities between Israel and Iran. After Israeli airstrikes targeted Iranian nuclear and military facilities, including the key uranium enrichment site at Natanz, and Iran retaliated, fears of a broader conflict sent oil futures soaring and injected fresh volatility into inflation forecasts.
Brent crude surged over 7% to trade around $74.38 per barrel, while West Texas Intermediate (WTI) jumped 7.5% to $73.12, with intraday spikes reaching nearly 14%, crude’s largest single-day jump in years. On a weekly basis, oil prices rose around 11% for both benchmarks, breaking through the $70 threshold.
While Iran’s oil infrastructure has been spared so far, the conflict has raised serious concerns about the security of maritime trade routes, particularly the Strait of Hormuz. Roughly 20% of the world’s oil supply transits through this narrow chokepoint, making it a flashpoint for global energy risk. Analysts fear that any disruption here could ripple across global markets, pushing crude prices past $100 per barrel, levels not seen since Russia’s invasion of Ukraine in 2022.
Oil price stability has been instrumental in keeping inflation in check. The U.S. Consumer Price Index (CPI) rose 2.4% year-over-year in May, but gasoline prices were down 12% over the same period, helping inflation remain close to the Federal Reserve’s 2% target. Oxford Economics estimates that every $10 increase in oil prices adds about 0.5 percentage points to inflation. JPMorgan warns that prices at $120 per barrel could drive CPI up to 5%, threatening the broader disinflationary trend.
Beyond oil, a widening of the conflict could endanger liquefied natural gas (LNG) flows from Qatar, a critical supplier accounting for roughly 20–21% of global LNG exports. If regional instability spills into the Gulf and threatens LNG shipping routes or production, industries in Europe and Asia, highly dependent on Qatari LNG, could face severe supply shocks and price spikes. This would introduce a new dimension to global energy insecurity, disrupting supply chains further and reinforcing inflationary pressures across energy-dependent industries.
Despite the market volatility and worst-case scenario modeling, most analysts currently see a broader military escalation as unlikely. Iran appears cautious to avoid disrupting its vital oil exports to key partners such as China, and Israel has shown no signs of seeking a prolonged or expanded campaign. Nuclear talks between the U.S. and Iran are still formally underway, with a meeting scheduled this Sunday in Oman. However, Iranian officials have indicated that any potential agreement remains distant without a shift in Israel’s position.
Conclusion:
While risks to global energy supply have clearly risen and market sentiment remains fragile, we do not believe the current conflict signals a sustained or broader escalation at this time. Nevertheless, energy markets are likely to remain highly sensitive to headlines. In particular, any sign of renewed threats to LNG flows from Qatar would represent a major inflection point for both industrial buyers and inflation expectations.