The outbreak of war between the United States, Israel, and Iran on February 28, marked by coordinated airstrikes that killed Iran's Supreme Leader Ali Khamenei and targeted nuclear and military sites, has triggered a historic disruption in global energy markets [1][4]. In response, Iran's Islamic Revolutionary Guard Corps (IRGC) effectively closed the Strait of Hormuz, a critical chokepoint for 20% of the world's daily oil shipments, by targeting tankers with drone strikes and causing shipping insurers to withdraw war-risk coverage [1][2]. As a result, tanker traffic through the strait has plummeted by over 90%, with only 21 tankers transiting in the weeks following the conflict, compared to more than 100 ships daily before [1]. Nearly 2,000 vessels and 20,000 sailors are stranded, and Iran has imposed a 'toll booth' system, charging up to $2 million for safe passage [1].
The closure has sent Brent crude prices soaring to just under $120 per barrel in the first week of the conflict, stabilizing in the $100–$113 range—about 40% above pre-war levels—with analysts attributing a $40 per barrel geopolitical risk premium [1][2][4]. West Texas Intermediate (WTI) crude futures rose 2.58% to $102.19 per barrel in early Asian trading [4]. The International Energy Agency (IEA) estimates that 16 million barrels per day remain trapped, as only a fraction can be rerouted via pipelines [1]. The crisis has also impacted liquefied natural gas (LNG), with Qatar declaring force majeure on contracts, causing gas prices in Asia and Europe to roughly double [1].
The energy shock has complicated central bank policy. The Federal Reserve held its benchmark rate steady at 3.50%–3.75%, with only one FOMC member dissenting in favor of a cut [2]. The Fed's updated 'dot plot' now projects just one rate cut in 2026, down from two previously, and markets have priced out any near-term relief, with September seen as the earliest possible cut [2]. Core PCE inflation was running at 2.7%, above the Fed's 2% target, and the OECD has raised its US inflation forecast to 4.2% [2][3]. The CME Group's FedWatch tool indicates over a 50% chance of a rate increase in 2025 [3].
Market reactions have been swift. European indices are set to open lower, with the FTSE 100 down 0.2%, DAX down 0.6%, CAC 40 down 0.4%, and FTSE MIB down 0.4% [4]. Asia-Pacific markets also traded lower [4]. Gold (XAU/USD) has edged higher, supported by a modest US dollar downtick, but remains capped by expectations of higher global interest rates and a bearish technical setup [3]. The conflict has also drawn in Yemen's Houthi movement, which launched missiles at Israel, further escalating tensions and raising the risk of additional disruptions to global trade routes, including the Bab el-Mandeb Strait [3][4].
In response to the crisis, G7 finance, energy ministers, and central bank governors are holding an emergency meeting, the fourth since the war began [4]. Forward-looking statements from Fed Chair Jerome Powell highlight the uncertainty: 'The economic effects could be smaller or bigger. We just don’t know' [2]. Analysts warn that oil prices could reach $170 or higher if the disruption persists into the summer [2].
CONCLUSION
The closure of the Strait of Hormuz amid the Iran war has triggered a severe energy supply shock, sending oil and gas prices sharply higher and rattling global markets. Central banks face a complex policy dilemma as inflation risks rise and growth slows, with no clear resolution in sight. Market volatility is expected to remain elevated as the conflict and its economic fallout continue to unfold.