Middle East Tensions Rattle Global Markets

Despite the scale of what many view as an unprecedented geopolitical flashpoint, the reaction across financial markets has so far been measured. The situation remains highly fluid, and headline risk will continue to loom large over asset prices in the days ahead. Even so, equity markets are still trading within recent ranges, and the spike in oil has been contained, with Brent crude holding below $80 per barrel.

In previous years, a sustained Middle East conflict,  particularly one involving direct hostilities between the US and Iran and attacks on US allies - would likely have triggered severe market disruption and lasting economic fallout. By comparison, if oil were to hold around a 7.5% daily decline, it would rank as the 53rd largest one-day drop on record, according to Bloomberg data. Significant, certainly, but far from a full-scale rout.

A geopolitical premium, but no surge to $100 oil

So why the relative calm? Crucially, neither side has targeted major oil or gas infrastructure. OPEC has announced plans to raise output next month to offset potential supply disruptions, and Iran has indicated it does not intend to formally close the Strait of Hormuz. Although a tanker was struck by a drone in the Strait over the weekend, the vessel was relatively small and responsibility remains unclear.

As a result, while a geopolitical risk premium is being priced into oil, reflecting, in part, higher insurance costs for shipments passing through the Strait of Hormuz - markets are not yet bracing for triple-digit crude prices.

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