Middle East Tensions Rise, Oil Prices Fall

While Middle East tensions are driving near-term market volatility, this focus is likely to be temporary as attention soon returns to major July and August policy decisions.

For most of 2025, the market has focused primarily on fiscal and trade policy uncertainty. However, as we alluded to recently, the threat of elevated geopolitical turmoil has been lurking beneath the surface, with recent events in the Middle East bringing it squarely to the forefront.

Escalation to Deescalate: The Timeline So Far

Since mid-June, military conflict between Israel and Iran has escalated rapidly. Israel launched air strikes targeting more than 100 Iranian nuclear and military sites. Iran responded with a large-scale missile and drone barrage on Israeli cities. The U.S. recently entered the conflict by striking key Iranian nuclear facilities with its “bunker buster” bomb capabilities.

Iran’s response was considered measured as they retaliated by targeting a U.S. airbase in Qatar and conducting a limited strike on Israel.

A U.S.-brokered ceasefire seems to be holding at the time of this writing.

The key point is that the Middle East remains highly unpredictable, and investors should not assume that recent developments mark the end of volatility stemming from the region. A regime change in Iran, for example, would create significant uncertainty as to the path forward for the region.

The Current State of Global Energy Markets

The price of oil serves as the main transmission mechanism for the economic effects of Middle East conflict. As our investment teams have discussed and debated these issues, the key observations are summarized as follows:

Oil Price Action (Jeff Wyll, Senior Research Analyst, Energy Sector)

From a demand perspective, the price of oil would need to sustain a level approaching $100 per barrel to meaningfully reduce global consumption. However, current energy market dynamics suggest we won’t reach that level (the per barrel price of crude oil has swung between the low $60s and high $70s for most of June and is currently in the mid to high $60s, well below its recent peak of almost $80).

At the beginning of the conflict, we estimated that oil prices reflected a geopolitical risk premium of about $10 to $12 per barrel, as the market attempted to price in the probability of supply disruptions amid ongoing tensions. As the conflict escalated and deescalated, oil prices experienced wild swings in both directions, a pattern that is likely to remain in the short term. Importantly, the price response to the conflict between Israel and Iran is not expected to be linear.

On the supply side, Iran exports approximately 1.6 million barrels of oil per day, mostly to China. Global spare capacity provides a buffer against moderate supply outages (OPEC +, U.S. shale capacity), but a potential blockage of the Strait of Hormuz remains the market’s central concern—since a significant portion of spare capacity would need to transit this critical chokepoint to reach global markets.

The Strait of Hormuz (Hakan Kaya, Senior Portfolio Manager, NB Commodities Strategy)

In addition to being an access point to spare capacity, the Strait accounts for ~20% of global oil flows and its closure would be a significant disruption for global oil markets. However, there are several reasons why we believe this is a low probability event:

• It is a “lose-lose” situation for Iran: Disrupting the Strait would negatively impact Iran as well as its allies, especially since most Gulf oil exports go to China, which Iran does not want to antagonize.
• Severe consequences from the U.S. and the West: Closing the Strait would likely provoke a swift and decisive military response from the U.S. and its allies, potentially threatening regime stability in Iran.
• Iran risks losing its own fleet: Attempting to close the Strait could result in Iran losing its naval assets stationed outside the Gulf, weakening its military position.
• Long-term erosion of the Strait’s significance: Closing the Strait could incentivize the development of alternative oil transport routes (like pipelines), reducing both the economic and political leverage Iran derives from controlling the Strait.
• Tanker routes avoid Iranian waters: Most tankers do not use Iranian waters when transiting the Strait, staying closer to Oman, so blocking the Strait would require a direct act of war against Gulf States, which would further isolate Iran and damage recently improved regional relationships.

Second-Order Effects

A sustained spike in energy prices remains the most significant second-order risk stemming from the Middle East conflict. Higher oil and gas costs would feed directly into headline inflation, raising input and transportation costs across sectors and ultimately weighing on consumer spending and corporate margins. In this scenario, the risk is that persistent inflation could force central banks to keep monetary policy tighter for longer, thereby increasing the probability of slower global growth or even recession.

However, we view this outcome as unlikely given the current supply landscape and the reasons outlined above regarding the low probability of a major supply disruption, particularly through the Strait of Hormuz. Market volatility around energy prices is to be expected, but absent a severe and lasting supply shock, we do not anticipate a prolonged inflationary surge driven by oil.

Looking further ahead, it’s possible that the current unrest could ultimately lay the groundwork for a more stable and secure Middle East, as regional actors and global powers may be incentivized to pursue longer-term solutions once the immediate crisis abates. This is, admittedly, an optimistic view. The Middle East remains a very challenging geopolitical hot spot, and one that is very difficult to predict.

For now, though, these geopolitical risks are likely to remain a short-term focus for markets. We expect focus will soon shift to the upcoming July and August deadlines for the U.S. tax bill and tariff policy decisions, the outcomes of which will have a more meaningful and long-term impact on the global economy and market sentiment. If the final tax legislation closely resembles the current pro-business draft and is accompanied by a moderate tariff rate, it could boost business confidence, potentially leading to stronger economic growth.