By Lina Irawan 
The apparent calm in global financial markets, with the S&P 500 exhibiting remarkable resilience – down only 3% year-to-date and a mere 5% from its all-time high – belies the rapidly escalating geopolitical crisis unfolding in the Middle East. This performance, far from signaling a bear market (a 20% decline) or even a correction (a 10% dip), suggests that investors have yet to fully price in the profound implications of the burgeoning U.S.-Israel war on Iran. However, this stoic market posture, as several strategists warn, could be the quiet before a significant storm, with a dramatic shift in sentiment potentially just weeks away.
The most immediate and tangible impact of the two-week-old conflict has been on the global energy markets. Oil prices have surged by more than 40% since hostilities commenced, pushing their year-to-date gains to nearly 70%. Despite this alarming ascent, current prices remain below the peak observed following Russia’s invasion of Ukraine in 2022. This apparent discrepancy exists even as Iran’s de facto blockade of the Strait of Hormuz—a critical maritime chokepoint—is effectively bottling up an estimated one-fifth of the world’s oil supplies. The Strait, a narrow waterway connecting the Persian Gulf to the Arabian Sea, is strategically vital, with approximately 21 million barrels of oil per day (bpd) typically transiting its waters, representing a staggering 30% of all seaborne traded oil and a significant portion of global liquefied natural gas (LNG) traffic. Its effective closure, whether through direct military action or the creation of an environment too perilous for commercial shipping, reverberates through every facet of the global economy.
"The end is not in sight," remarked Dan Alamariu, chief geopolitical strategist at Alpine Macro, in a recent note to clients. "The Strait of Hormuz is effectively closed, and markets are starting to price in a prolonged, uncertain endgame." This sentiment underscores the growing concern among energy analysts and geopolitical experts that the current market stability is built on shaky ground, potentially underestimating the duration and severity of the conflict’s economic fallout. The International Energy Agency (IEA), a Paris-based autonomous intergovernmental organization, has already declared the Iran war responsible for the worst oil disruption in history. While member nations have agreed to release 400 million barrels from their strategic reserves, the daily flow from these stockpiles is expected to fall significantly short of offsetting the estimated 15 million bpd that has been cut off from the Gulf region, highlighting the immense supply deficit.
Further compounding the dire outlook, energy research firm Wood Mackenzie issued a stark warning on Tuesday, indicating that with such a massive volume of Gulf supply suddenly offline, Brent crude prices would need to hit an extraordinary $150 a barrel for "demand destruction" to kick in and rebalance the market. Demand destruction refers to a sustained reduction in oil consumption due to persistently high prices, forcing consumers and industries to cut back or seek alternatives. Simon Flowers, Chairman and Chief Analyst at Wood Mackenzie, cautioned that while inflation-adjusted oil prices did reach $150 after Russia’s invasion of Ukraine, the current situation presents an even graver threat. "Supply volumes at risk this time are dimensionally bigger—and real," he asserted, adding a chilling prediction: "In our view, US$200/bbl is not outside the realms of possibility in 2026." Such prices would unleash unprecedented inflationary pressures, crippling global economic growth and potentially plunging major economies into recession.
The diplomatic landscape, meanwhile, offers little hope for a swift resolution. Recent reports from Reuters indicated that both U.S. and Iranian officials have outright rejected efforts by other Middle Eastern countries to initiate ceasefire negotiations. Adding to the diplomatic impasse, President Donald Trump, in an exclusive interview with NBC News, stated that while Iran is ready to negotiate a ceasefire deal, he is "not willing yet to make an agreement." Trump emphasized that any terms would have to be "very solid," declining to elaborate on what those specific terms might entail. This hardline stance from the U.S. side suggests a strategy aimed at maximizing pressure on Tehran, likely seeking comprehensive concessions regarding its nuclear program, regional proxy activities, and, crucially, the cessation of its blockade on the Strait of Hormuz. For Iran, any deal would likely need to include the lifting of crippling sanctions and assurances against future attacks, a tall order given the current climate.
Despite a punishing bombardment that has reportedly decimated elements of Iran’s military infrastructure and tragically eliminated top leadership, the Iranian regime has demonstrated remarkable resilience. It continues to project its power, effectively threatening shipping in the Persian Gulf and maintaining the upward pressure on global oil prices. Alamariu notes that Tehran, in its current calculus, has "no appetite yet to reach a deal that ends the conflict," instead seeking to deter any future attacks by inflicting as much economic pain as possible right now. This strategy of "deterrence by punishment" leverages Iran’s asymmetric warfare capabilities, including its vast arsenal of missiles, drones, and naval mines, alongside the influence of its Revolutionary Guard Corps and various regional proxies.
However, even as Iran demonstrates defiance, internal pressures are mounting. Alamariu predicts the war could end within two months, citing growing threats to Iran’s economy and its internal political control. Airstrikes have reportedly targeted key levers of repression, such as the Islamic Revolutionary Guard Corps (IRGC) and the Basij militia, which are integral to the regime’s domestic security apparatus and its projection of power abroad. Rumors of power struggles within the regime are also circulating, particularly following the selection of Mojtaba Khamenei, son of the current Supreme Leader, as a potential successor. This succession could signal significant shifts in Iran’s political landscape. "As such," Alamariu wrote, "even the Tehran regime has an incentive to eventually end the war, as a lengthy conflict risks fractures and its own self-preservation." A prolonged conflict could exacerbate economic hardship, fuel public discontent, and destabilize the intricate power structures that have sustained the Islamic Republic for decades.
President Trump, too, is grappling with his own set of constraints. Skyrocketing oil prices directly translate to higher gas prices at the pump, a politically toxic issue for any incumbent administration, especially with midterm elections looming later this year. Public support for prolonged military engagements, particularly in the volatile Middle East, tends to wane quickly, creating significant political pressure. Trump’s need for a decisive "win" or a "very solid" deal before the elections is a critical factor influencing his negotiating stance.
In the interim, both sides appear poised for further escalation. On Friday, the U.S. launched attacks on military sites on Kharg Island, Iran’s primary terminal for oil exports, a move designed to cripple Iran’s revenue lifeline. Concurrently, the U.S. is deploying an additional 2,500 Marines to the Middle East, signaling a deepening commitment to military action. Iran, in response, has reportedly escalated its targeting of civilian infrastructure among its Gulf neighbors and, ominously, threatened the region’s biggest port on Saturday.
The potential for a broader regional conflagration is also a grave concern. Alamariu noted the high likelihood that Iran’s Houthi allies in Yemen will attempt to close the Red Sea to commercial shipping. The Red Sea, accessed via the Bab el-Mandeb strait, is another vital chokepoint, serving as a crucial alternative route to the Suez Canal for Europe-Asia trade and accounting for an additional ~5 million bpd of oil flows. "A simultaneous two-strait disruption would compound the shock," he warned, "impacting the additional ~5 mb/d oil flows that normally transit the Bab el-Mandeb and impairing a main Europe-Asia trade route. This could stoke inflation further, especially in Europe."
While a full-scale ground invasion of the Iranian mainland remains an unlikely and strategically fraught option for the U.S., the idea of seizing Kharg Island has gained traction among some strategists. The thinking is that such an operation could effectively cut off the regime’s vital oil revenue without requiring a full occupation of the mainland, thereby forcing a deal. However, even a limited landing on Kharg would expose U.S. Marines to significant risks from Iran’s formidable array of missiles and drones, which have demonstrated their capability to strike U.S. military bases across the Middle East despite sophisticated air-defense systems.
A more dire and potentially catastrophic escalation option involves targeting desalination plants, which produce the vast majority of fresh water for the Gulf region. David Sacks, President Donald Trump’s AI and crypto czar, recently flagged this terrifying possibility, warning that such an attack could render the Gulf almost uninhabitable, triggering an unprecedented humanitarian and ecological crisis.
Despite the current market composure, Alamariu acknowledges a growing chance that the war could last longer than his initial two-month outlook. Should this scenario materialize, the Strait of Hormuz would likely remain closed for the duration, pushing Brent crude prices to consistently stay above $100 a barrel, and potentially even topping $150. Yet, remarkably, the market has not yet reached maximum panic. "Peak war panic is more likely to hit in the next 1 to 3 weeks," he predicted, observing historical patterns where crude prices typically peak four to eight weeks into similar conflicts. The Iran war has now entered its third week, aligning with this historical window.
A global risk-off event, characterized by a major stock market plunge, could be triggered by several catalysts: a direct intervention by Houthi forces in the Red Sea, Gulf producers declaring "force majeure" on their oil contracts due to the inability to ship, or further significant U.S. escalation. Beyond oil, the closure of the Strait of Hormuz would have cascading spillover effects, impacting critical global supply chains for agricultural commodities and semiconductors. Essential inputs like fertilizer, whose production is energy-intensive, and specialty gases like helium, crucial for semiconductor manufacturing, would face severe shortages, exacerbating inflationary pressures across diverse sectors.
"If we are wrong and the war drags past two months," Alamariu warned, "the playbook shifts from trading volatility to hedging for structural economic damage." This implies a move beyond short-term market fluctuations to a long-term recalibration of investment strategies to account for fundamental disruptions to global trade, energy supply, and economic growth patterns.
The gravity of the situation cannot be overstated. With 15 million bpd of Gulf supply suddenly gone, Wood Mackenzie’s Simon Flowers starkly reiterated that "US$200/bbl is not outside the realms of possibility in 2026." This unprecedented scenario underscores the precarious balance currently held by global markets. While the S&P 500’s current resilience might offer a fleeting sense of security, the escalating military conflict, diplomatic deadlock, and the dire forecasts for energy prices paint a picture of an impending economic shock that investors may soon be forced to confront with a full-blown panic. The world watches, holding its breath, as the Middle East teeters on the brink, and with it, the stability of the global economy.