The Gulf shock: Energy supply, markets, and macro spillovers

Oil has risen as expected, but the disruption is now spreading from transport bottlenecks in the Strait of Hormuz to energy production itself, reinforcing broader risk off dynamics ahead of any material improvement on the battlefield.

Our forecast last week assumed oil prices would remain below $100 provided production was not directly affected. That condition has now been breached, with Saudi and Bahraini refineries hit alongside Qatar’s gas liquefaction facility.

Brent was trading at around $100 per barrel as of 9 March, having briefly peaked at nearly $120. Figure 1 shows the percent change in the Brent oil price, following the outbreak of war in Ukraine in 2022 compared with what we are seeing today.

Four years ago, oil peaked at $130 and stayed above $100 for four months before gradually normalising by early 2023. Given market conditions being different, a rebased view here (not the USD price!) is helpful, showing a 35% jump thus far. Unsurprisingly, the pace has been faster, as the 2022 conflict touched 10% of global production, whereas the Gulf is home to close to 30%.

We are now closer to the equilibrium price for a regional conflict, with next leg up requiring further escalation or signs that Hormuz will remain shut for more than 2-3 weeks. Current levels of shipping trigger cascading problems after about two weeks of closure. That is when producers can no longer divert newly produced oil to either seaborne or onshore storage and then have to ‘shut in’ production.

To avoid shut-ins, producers will start throttling production in advance to buy more time. Iraq has already begun to do that—cutting production by 3mbd (about 75% of its daily output) in the hope that it can maintain production until transport reopens. Iraq is a special case with much lower storage capacity than other producers. However, the UAE and Kuwait have over the weekend announced that they are trimming production as well, in order to cope with a longer closure period of the Hormuz Strait.

Summary of trends pointing to further deterioration

Figure 2 shows the one major positive development in the rapid decline in Iranian ballistic missile launches, though drone warfare remains relatively stable with over 100 daily drones directed at the UAE alone. For comparison, Russia shot an average of 156 Iranian-made Shahed drones every day at Ukraine for all of 2025—i.e., 57,000 in total. Iran’s estimated drone supplies are 30%-40% of that. Moreover, Russia launched from fixed installations unimpeded. Iran also relies on more skilled manpower for launches that cannot be easily replaced. Nonetheless, that still leaves Iran with the ability to launch 50-100 drones strikes daily for several weeks, impeding the return of full normality in the Gulf. Other developments at the political and economic levels are also suggesting near-term deterioration.

Market implications

This is a classic stagflationary supply shock for energy importers, which will again require a fiscal counter-response. Using Bloomberg’s SHOK model, a $50 increase in oil prices (i.e. around $115) in one quarter would equate to nearly a 1% increase in US CPI over the following three quarters. Bond markets have sharply adjusted to this inflation dynamic for weaker European sovereigns, and to a lesser extent, for the US and Germany as well.

Notably, in 2022, bond yields did not rise until the third week of the war when the magnitude of Ukraine support and European rearmament costs came into vision. If the current crisis persists, we would assume upward pressure on bond yields to continue. Similarly, we would forecast continued USD strength to be maintained as a corollary of America’s energy profile. Both trends are vulnerable to a sharp reversal upon de-escalatory news.  

What else to watch for

• Do the Houthis enter the conflict and disrupt Red Sea shipping, now of greater strategic importance due to diverted Gulf oil exports?
• How durable does US political will appear, and what benchmarks would the Trump administration use to declare an end to the engagement?
• Does serious damage to Iranian military and paramilitary forces and material affect morale?
• Is there a risk of damage to critical nonenergy infrastructure in the Gulf, such as desalination plants?

Bottom line

Iran’s success in maintaining sufficient firepower into the Gulf means the war is now morphing into a negative global macro shock (supportive for the USD, gold, and commodities; negative for bonds and equities). That said, it is difficult to envisage the duration of this shock exceeding one to two months. Even in a more prolonged conflict, a partial normalization of oil prices would be likely.

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