It’s happening. US crude just hit $120 per barrel at the open before retreating to around $107 by the time I came to my desk, while Brent crude peaked at $113 per barrel before retreating as well. Still, both benchmarks are consolidating above the $100 per barrel mark this morning as hopes for peace waned following the appointment of Khamenei’s son as Iran’s next Supreme Leader – a decision that did not please the US at all.
The choice suggests that Iran will not back down to the US, and that means a potentially prolonged war in the Middle East – which is home to about 50% of global oil reserves and around 40% of the world’s natural gas reserves. About 20% of the world’s oil and LNG flows through the Strait of Hormuz, which is presently closed, making it one of the most critical energy chokepoints in the global economy.
US Natural Gas, on the other hand, is up 6%, and the European TTF will likely open the week on a very ugly note.
China had already ordered its biggest refiners to stop exporting refined products last week. The US will likely be forced to tap its Strategic Petroleum Reserve, but the SPR currently holds around 415 million barrels — barely 60% of capacity and far below the roughly 640 million barrels held just a few years ago. That makes it a short-term buffer, not a durable solution to a prolonged energy shock.
So what happens next? Oil prices will reach a peak at some point – maybe they already have, maybe there’s more to come – but they are likely to fluctuate at elevated levels for weeks, perhaps months. Eventually – even if the war persists – energy prices will likely come down. But during this period, high energy prices will revive inflation globally and weigh notably on growth.
The euro area economy, for example, didn’t wait for a new energy crisis to slow in 2025, while things in the US aren’t looking brilliant either. The headline growth number there looks better thanks to massive AI investment, but that doesn’t tell the full story.
Friday’s US jobs report is the latest example that the US economy isn’t doing that well. Instead of adding jobs, the US economy shed 92K nonfarm jobs in February, 12K manufacturing jobs were lost, and the previous month’s figure was revised down by 69K. The unemployment rate unexpectedly rose to 4.4%, and wage growth accelerated to 3.8%, which was also unexpected.
Retail sales were stronger than expected – as wealthier Americans continue to spend – but the combination of job losses and stronger wage growth did not reassure investors at a time when inflation expectations are rising alongside energy prices amid escalating tensions in the Middle East. Soon, these pressures will start showing up in consumer prices.
Hence, the weak jobs report failed to revive dovish Federal Reserve (Fed) expectations. The US 2-year Treasury yield, which best captures Fed expectations, spiked to 3.63% on Friday and is consolidating near that level this morning, while the US 10-year yield climbed to 4.20%.
Elsewhere, global yields are also pushing higher, as the spike in energy prices raises expectations that central banks may have to tighten policy again to deal with a new energy shock. Asian indices opened the week with deep losses, while US and European futures are pointing to 2–3% declines at the open.
The US dollar is better bid, and it is pretty much the only traditional safe haven benefiting from strong inflows.
Even gold is down this morning, unable to attract safety flows despite its reputation as an inflation hedge. Why? Hard to tell. According to a Bloomberg report, the Middle East war may also be disrupting gold flows. Gold stranded in Dubai, they say, is “being sold at a discount as grounded flights make it harder to move the precious metal.”
If global markets are on fire, it’s because energy is central to inflation dynamics. Energy can account for roughly one-third to one-half of CPI fluctuations, and in periods of market stress the impact can be even greater.
And it’s not only energy: food prices could also be badly impacted by Middle East trade disruptions.
More than a century ago, two German scientists developed a process that changed global agriculture forever. Known as the Haber-Bosch process, it produces fertilizer by combining nitrogen from the air with hydrogen. The process relies heavily on natural gas, and the Gulf region handles a large share of global nitrogen fertilizer trade.
Nitrogen fertilizer is essential to modern agriculture and supports roughly half of global food production. With Gulf countries in conflict and traffic through the Strait of Hormuz near a complete halt, it may only be a matter of time before global food prices start rising sharply, adding further pressure to consumer prices.
So when the US releases its latest CPI report on Wednesday, investors will keep in mind that whatever the print, next month’s figures will likely be higher. Rising inflation expectations will likely keep Fed doves at bay.
The Fed will struggle to deliver the two rate cuts that markets had anticipated before the Middle East conflict erupted. And even if it does – because yes, the Fed can cut rates if it wants to – the market may not follow.
Investors could refuse to “buy” an unjustified rate cut, meaning sovereign yields could keep rising despite lower policy rates, and monetary policy may fail to transmit effectively to markets if perceived as inappropriate.
Remember the Fed’s jumbo rate cut in September 2024: the US 10-year yield rebounded by about 120bp in the following three months.
So no, the Fed cannot simply cut rates — and may not be able to cut at all this year if the war extends beyond a few weeks.
