Investors still interpret the rise in oil prices as a temporary geopolitical surge, not the start of a long-term change in energy risk dynamics.
This is at a time when Brent crude hits around $115 a barrel, marking a nearly 60% increase in March, the fastest monthly surge since the Gulf War, while global stock markets tumble and Middle Eastern supply routes experience unprecedented disruptions.
Brent hitting the $115 mark is being dismissed as a temporary spike, but the numbers suggest otherwise.
Oil surge signals deeper structural risk
Prices have surged nearly 60% in just one month, options markets are pricing in the possibility of $150 oil, and disruptions through the Strait of Hormuz have affected up to 20% of global supply. These aren’t signs of a brief, fleeting shock.
Oil markets are responding to rising military tensions, damaged infrastructure, and direct threats to a key global energy chokepoint. Traffic through the Strait of Hormuz has ground to a halt, leaving millions of barrels per day stranded and effectively removed from the global supply.
As I was quoted by Investing.com, Daily Mail, London Loves Business, Business Money, Business Standard, and Market Forces Africa, amongst others, if these disruptions continue, the market could face a shortfall of 10 to 14 million barrels per day, against a backdrop of global demand just over 100 million barrels, a gap that would be extremely difficult to close.
With spare capacity tight and logistics stretched, the pricing dynamics are being fundamentally altered.
Markets are also grappling with an expanding conflict. Strikes have moved beyond oil infrastructure to industrial supply chains, driving up aluminium prices as Gulf production sites are affected.
Meanwhile, European gas prices are climbing once more, amplifying the ripple effect of energy shocks on both industrial output and consumer costs.
Investor positioning is still rooted in outdated assumptions.
Markets misreading a shifting energy landscape
Markets are accustomed to the past decade, where geopolitical events caused short-term volatility but rarely led to sustained price changes. Today’s environment resembles the 1970s, when supply shocks directly drove prolonged stagflation.
The magnitude of the disruption makes the situation clear. Oil prices are rising more rapidly in this conflict than during past major geopolitical crises, such as the Iraq War or the Ukraine conflict.
Political signals are adding to the uncertainty. US President Donald Trump has hinted at the possibility of seizing Iranian oil assets, including the crucial export hub at Kharg Island, while simultaneously leaving the door open for a potential deal.
This dual approach injects policy-driven volatility into an already fragile supply environment.
Energy markets are no longer guided solely by supply and demand, political actions have become a key factor. Statements about seizing assets, limiting exports, or controlling transit routes now have immediate effects on prices.
Financial markets are starting to respond, but the reaction is far from complete.
Asian equities have taken a steep hit, with Japan particularly affected due to its dependence on imported energy.
Bond yields are climbing as inflation expectations shift, and currencies are reacting to changes in growth and price forecasts.
Despite this, overall asset allocation hasn’t fully accounted for a sustained period of high energy costs.
Equity markets are showing stress, yet much of portfolio construction still assumes oil prices will revert. There’s a clear disconnect between market moves and investor positioning.”
The macroeconomic impact is substantial. Prolonged oil prices above $100 directly drive inflation, reduce consumer purchasing power, and squeeze corporate margins. Energy-importing countries are especially vulnerable, and industrial sectors face rising costs on multiple fronts.
A persistent $100-plus oil environment fundamentally alters expectations for inflation, interest rates, and economic growth.
It raises the likelihood that stagflation could return in parts of the global economy.
Options markets are already signalling this risk, with trading activity spiking in contracts betting on oil hitting $150 or more in the coming months, showing that some investors are starting to factor in a longer-lasting disruption.
Markets are still hoping for a quick resolution that will push prices back down.
So far, there’s no clear sign that this will happen.
Investors who continue to view this as a short-term spike may find themselves significantly underprepared.
In addition, in the UK, Prime Minister Keir Starmer and Chancellor Rachel Reeves must be upfront about the risk of imminent fuel shortages, the potential for UK inflation to rise again, the possibility of further pressure on the pound, and the increasing threats to the UK bond market.
UK faces heightened exposure to energy shocks
The PM is meeting today with energy companies, shipping firms, and insurers to evaluate the impact of rising Middle East tensions and the risks to shipping through the Strait of Hormuz.
The UK is more vulnerable than most advanced economies, and that reality must be communicated clearly.
Around 35-40% of the UK’s energy is imported, and the country depends on global markets for both crude and refined products. Any disruption to critical supply routes directly impacts domestic prices and economic stability.
Energy costs ripple quickly through the economy, affecting fuel, transport, food production, and manufacturing. If oil and gas prices stay high, UK inflation will rise again, likely faster than most forecasts anticipate.”
The UK has only recently emerged from a period of double-digit inflation largely driven by energy prices. A new surge would hit while household finances remain tight and businesses have little room to absorb further cost increases.
Reeves is operating under an economic framework that assumes inflation will ease and stability will return. A prolonged energy shock directly challenges that, as higher input costs pass through to consumers, squeeze real incomes, and complicate growth prospects.
Currency markets are also extremely sensitive to these pressures.
Because the UK imports a large portion of its energy, rising prices increase the need for foreign currency to pay for imports. This widens the trade deficit and puts downward pressure on the pound, especially during times of heightened uncertainty.
If disruptions through the Strait of Hormuz continue, investors should anticipate increased volatility in the pound and a significant risk of further depreciation.
Furthermore, the gap between the UK and other major economies is becoming increasingly clear.
The US benefits from abundant domestic energy production and is better shielded from global supply shocks. Energy-exporting countries gain directly from higher prices.
The UK, by contrast, is more exposed, facing higher costs without comparable protection. This makes UK assets particularly vulnerable when energy prices rise.
The effects also reach directly into the UK government bond market.
Gilts are especially vulnerable. If rising energy prices drive inflation higher again, yields will have to increase to reflect the heightened risk.
With UK debt already approaching 100% of GDP, rising borrowing costs become a serious concern.
The UK depends heavily on overseas investors to fund its deficit. If they face a weaker pound alongside higher inflation expectations, they may demand higher returns or cut their exposure, adding further fragility to the gilt market.
Financial markets are starting to react, but the response remains incomplete.
Equities are showing stress, especially in sectors sensitive to input costs, and bond markets are adjusting to changing inflation expectations. Yet overall positioning still assumes that oil prices will decline and conditions will stabilise.
The Middle East situation remains highly volatile, with escalating military activity and persistent threats to infrastructure heightening supply uncertainty.
Political signals are further destabilising markets, as Trump has hinted at the possibility of seizing Iranian oil assets while also leaving room for a potential deal.
Together, these factors are changing the way energy markets need to be interpreted.
Supply and demand remain important, but political decisions, security risks, and control over key transit routes have become central drivers of pricing. This not only heightens volatility but also makes it more likely that high prices will persist.
The consequences for the UK are significant.
Starmer and Reeves must be candid with the public.
The UK is particularly vulnerable to global energy shocks, and these risks are growing. Investors, businesses, and households should brace for higher inflation, a weaker pound, and greater volatility in gilts if disruptions persist.
To read my previous blog post, click here.