Since the escalation of the conflict between Iran and Israel, crude oil prices have continued to fluctuate violently. Although the United States and Iran reached a ceasefire agreement in April this year, the two sides recently launched missiles at each other for the first time, putting renewed pressure on energy markets.
According to multiple media reports, Iran fired missiles at Israel last Sunday, stating that the move was in response to Israeli bombings in the southern suburbs of Beirut, Lebanon. Israel struck back the following day, launching a large-scale attack on Iran’s “strategic defense systems.” Subsequently, Iran stated that it had ceased its attacks, but if Israeli forces continued airstrikes in Lebanon, Iran would resume its strikes. However, Israeli Prime Minister Benjamin Netanyahu stated that the war against Iran and its Lebanese proxy Hezbollah is “not over yet.”
Uncertainty is an investor’s nightmare, and the crude oil market is no exception. Amid continued tensions, the Strait of Hormuz—a narrow waterway that normally carries one-fifth of the global oil supply—remains at a standstill. As of press time, the Kalshi prediction market platform shows that users assign a 66% probability to the strait returning to normal navigation by January next year.
Even if the United States, Iran, and Israel reach a long-term agreement tomorrow, supply chain recovery will still take time. After the conflict ends, oil prices are unlikely to return to pre-war levels because the market has now realized that Iran can close the Strait of Hormuz relatively quickly, severely impacting oil prices. This risk will be factored into oil prices for a long time to come.
Despite the recent conflicts, crude oil prices have actually performed more resiliently than many expected. As of press time, WTI crude oil futures were priced at approximately $91.38 per barrel.
Although crude oil is not included in core inflation metrics, its price volatility is higher than that of other consumer goods. Rising oil prices increase overall economic costs, exacerbate affordability issues for residents, and push up overall inflation. Therefore, persistently high oil prices could continue to weigh on consumers, and the U.S. economy is heavily dependent on consumer spending.
Ultimately, the longer oil prices remain elevated, the more lasting the negative impact of inflationary pressures on the economy. This could force the Federal Reserve to consider raising interest rates, to which investors typically react poorly.
The worst period seems to have passed, but the Strait of Hormuz still needs to resume normal transit. The situation in the Middle East remains unpredictable, and investors should not rule out the possibility of a rapid escalation of tensions. Therefore, trading based on short-term events in the Middle East is not recommended. However, if all parties can reach an agreement as soon as possible, oil prices could fall, which would be positive for the market. Positive developments may still occur within the year, providing a short-term catalyst for the market.
