Oil prices have rallied sharply this morning following the collapse of the US-Iran nuclear deal and the resumption of Israeli military strikes in the region, sending the West Texas Intermediate benchmark above $92 a barrel. The breakdown of negotiations in Vienna, which had been seen as a last-ditch effort to curb Tehran's nuclear programme, has reignited fears of supply disruptions from the Strait of Hormuz. Israel's renewed airstrikes on Syrian and Iranian positions have only added to the risk premium in the market.
Investors are now pricing in a heightened probability of a direct conflict, which could disrupt the flow of approximately 20 million barrels per day through the narrow chokepoint. The rally has caught many short-sellers off guard, with open interest in crude futures climbing as speculative money piles back into the market. For the fiscal hawks among us, this is a reminder of how fragile our assumptions about energy security truly are.
The Bank of England and the ECB will be watching these developments closely, as a sustained rise in oil prices feeds directly into headline inflation and complicates the already delicate task of monetary policy normalisation. Consumers will soon feel the pinch at the pump, and that could well be the final nail in the coffin for the 'soft landing' narrative. Meanwhile, gilt yields have edged higher on the prospect of sticky inflation, and the pound has taken a knock.
Capital flight is already in motion, with investors rotating into the dollar and yen. The bottom line is this: geopolitical risk has returned with a vengeance, and markets are repricing accordingly. Fiscal discipline will be tested as governments contemplate strategic reserves releases, but such measures are merely a sticking plaster.
The real challenge is structural: an over-reliance on volatile regions and a failure to diversify energy sources. This is a market that demands a premium for uncertainty, and we are likely to see that premium persist until the risk of outright war recedes. For now, the prudent investor hedges, and the cautious Treasury builds buffers.
The rest is speculation on the whims of geopolitics.
