Markets Confront the Economic Impact of the Iran Conflict

Information as of March 10 webinar discussion

The escalation of military action against Iran has rapidly evolved into a global economic shock, with repercussions stretching far beyond the Middle East. What began as a geopolitical crisis has quickly disrupted critical energy routes, shaken commodity markets and raised new questions about inflation, growth and financial stability.

Compared with previous geopolitical shocks, including the war in Ukraine, the current disruption could prove even more significant for global markets given the central role the Gulf plays in global energy supply.

Moderating Natixis CIB’s webinar on the topic, Alicia Garcia Herrero – Chief Economist for Asia Pacific, discussed how the conflict is reshaping energy markets, commodity supply chains, economic outlooks and financial markets, with Thibaut Cuilliere – Head of Real Asset & sector Research, Bernard Dahdah – Metals & Mining analyst, Alain Durré – Head of EMEA Economic Research, Joel Hancock – Energy Analyst, Christopher Hodge – Head US Economist, Trinh Nguyen – Senior economist Emerging Asia, and Florent Pochon – Head of cross-asset strategies.

With tanker traffic through the Strait of Hormuz effectively blocked, disruption for oil markets has quickly moved from a logistical problem to a genuine loss of supply.

Around ten million barrels per day of crude exports are currently unable to reach global markets once limited rerouting options are taken into account. As storage facilities in the region reach capacity, producers have begun cutting output, turning what initially appeared to be a transport disruption into a direct reduction in available supply.

This dynamic has already triggered significant price volatility. Brent crude surged sharply, briefly reaching around $120 per barrel before retreating as markets reacted to the possibility of coordinated releases from strategic petroleum reserves and political signals suggesting a potential de-escalation.

Strategic reserves could help offset part of the shock, but they are unlikely to fully replace the lost flows. While global stockpiles are large on paper, the ability to release oil quickly enough to match such a large disruption remains uncertain. Even under optimistic assumptions, releases might cover only part of the shortfall.

As a result, oil markets are likely to remain structurally tight while the disruption persists. If the situation extends for several weeks rather than days, average prices could remain around or above $100 per barrel. Even after the conflict ends, rebuilding depleted inventories and increasing precautionary stockpiles could keep markets tighter for longer.

Commodity markets are beginning to feel pressure across several supply chains, particularly those linked to Gulf production.

Gold, traditionally the most visible safe-haven asset in times of geopolitical stress, has reacted less dramatically than expected. Much of the geopolitical risk had already been priced in before the escalation of the conflict. The focus is now shifting toward the inflationary consequences of sustained energy price increases and how those might affect global monetary policy.

Industrial commodities could face more direct disruptions. Gulf countries account for a significant share of global aluminium production, while also supplying large quantities of sulfur – a key ingredient used to produce sulfuric acid. This chemical is essential for several industrial processes, including copper extraction and the processing of nickel ores.

Any sustained disruption to sulfur supply therefore has the potential to ripple through industrial metals markets. Nickel production in Indonesia and certain forms of copper extraction are particularly dependent on sulfuric acid inputs. Fertilizer production may also be affected, raising the possibility of further pressures in agricultural markets.

For the United States, the economic consequences may ultimately be felt less through inflation and more through growth.

While the US is now a net exporter of energy, households remain highly sensitive to rapid changes in fuel prices. Historically, sharp spikes in oil prices have been associated with sudden slowdowns in consumer spending when they exceed certain thresholds.

The current environment also differs from earlier energy shocks. During the price surge that followed Russia’s invasion of Ukraine, American households still held significant savings accumulated during the pandemic. Those buffers have largely disappeared, leaving consumers more exposed to price shocks.

Higher oil prices could therefore dampen consumption and reinforce signs of slowing momentum in the US economy. If that dynamic intensifies, the Federal Reserve may ultimately view the inflationary impact of the shock as temporary while placing greater emphasis on supporting economic activity.

Europe’s exposure to the conflict differs in important ways. The region imports relatively little oil directly from Iran and only a limited share of its supplies pass through the Strait of Hormuz. In addition, most European countries hold substantial strategic oil reserves, providing a buffer against immediate supply disruptions.

However, Europe remains highly sensitive to energy prices. The primary economic impact of the crisis is therefore likely to come through higher fuel and energy costs rather than physical shortages.

Even relatively modest increases in energy prices could have measurable macroeconomic effects. A sustained rise would tend to weigh on economic growth while pushing headline inflation higher. The balance between those forces will play an important role in shaping monetary policy expectations.

In recent years, the European Central Bank has increasingly emphasized a medium-term approach to price stability. That framework suggests policymakers may look through short-term inflation spikes caused by external energy shocks, focusing instead on the longer-term trajectory of prices and economic activity.

If the United States and Europe face indirect consequences, Asia sits much closer to the center of the economic shock.

Most Asian economies depend heavily on imported energy, with large volumes of crude normally flowing through the Strait of Hormuz. The region therefore faces a dual challenge: higher prices and the need to secure alternative supply routes.

Large economies such as Japan and China maintain relatively substantial energy reserves, providing some short-term protection. But many emerging economies have far smaller buffers and fewer options for diversifying supply.

For these countries, the adjustment mechanism may be more painful. In the absence of large reserves or the financial capacity to outbid competitors for redirected shipments, demand destruction may become unavoidable.

The economic consequences could be compounded by Asia’s deep integration into global manufacturing supply chains. Disruptions to commodity inputs such as metals, fertilizers and energy products could reverberate through industrial production and trade flows across the region.

Fiscal capacity will also play a key role. Many governments rely on energy subsidies to stabilize consumer prices, but the ability to expand those programs varies widely across countries.

Credit markets have responded quickly to the escalation, reversing much of the tightening seen earlier in the year. Spreads widened sharply as investors reassessed the implications of higher energy prices and rising geopolitical uncertainty for corporate margins and growth.

The move has been most visible in high yield, where spreads briefly crossed key psychological thresholds before partially retracing. The adjustment reflects sensitivity to shocks that simultaneously affect both economic activity and input costs.

Sector dispersion is also emerging. Airlines are particularly exposed, facing higher fuel costs alongside operational disruptions across Middle Eastern air routes. Autos and chemicals have also come under pressure given their exposure to energy prices and global industrial demand.

While credit markets remain orderly, the repricing highlights the vulnerability of corporate debt to sustained energy shocks.

Across asset classes, market reactions have remained relatively contained despite the scale of the geopolitical shock.

Equity performance has diverged by region. Asian markets have declined the most, reflecting their dependence on imported energy and global trade. European equities have also weakened, while US markets have been comparatively resilient.

Credit spreads and volatility have moved higher but remain well below levels seen during previous geopolitical crises. For now, investors appear to be treating the disruption as temporary.

The key risk lies in growth expectations. If the shock begins to weigh on global activity, broader adjustments across equities, credit and commodities could follow.