The Implications of Sustained High Oil Prices

How the largest supply disruption in Oil market history is reshaping the economy, equities, and bond markets.

Where Oil Prices Stand

Brent crude oil closed at $103.14 per barrel on Friday, the 14th of March, with WTI closing at $98.71. Prices spiked to $120/barrel before settling down with President Trump stating operations in Iran were "very complete." Alas, things don't seem complete as Brent has risen around 47% since pre-conflict levels. The core driver is the Strait of Hormuz. Roughly 20 million barrels of oil pass through it daily, and Iran closed it for the first time in history while threatening to attack ships attempting transit.

The IEA projects that the global oil supply will plung heavy with demand also slumping due to such high prices. Global inventories are at over 8.2 million barrels, the highest since February 2021, providing some buffer. However, the IEA has agreed to a historic release of 400 million barrels from its stockpile to bridge supply gaps.

Broader Economic Implications

A supply-side shock often introduces stagflation risk - a mix of inflation combined with slowing growth. In Europe, eurozone growth could be reduced by 0.1% with inflation rising 0.5%. Gasoline prices in the US have risen above $4 per gallon, complicating the Fed's responsibility for keeping inflation in check.

Inflation Channel

In the US, gasoline prices have risen above $ 4 per gallon for the first time since late 2023. The February CPI came in at 2.4% year-over-year, but this is backwards-looking and does not yet reflect the energy shock. Analysts expect the war to lift inflation readings materially from March onwards. In the UK, the OBR estimates an additional 1% on CPI by year-end if energy prices remain at current levels. In Europe, Deutsche Bank and Oxford Economics have flagged rising risks of recession and stagflation, with eurozone growth potentially reduced by 0.1% and inflation up 0.5%.

Interest Rate Channel

The oil shock has fundamentally disrupted the global rate-cutting narrative. Before the conflict, markets were pricing in steady easing across developed economies. That expectation has been shattered. In the UK, bond markets had priced a near-certain BoE cut in March; expectations have now shifted to June at the earliest. In the US, some traders have pushed the next expected Fed cut all the way to mid-2027. The 10-year US Treasury yield surged from 3.97% to 4.28% in two weeks, a massive move reflecting a “war premium” estimated at 0.5–0.7 percentage points on inflation expectations.

Equity Market Impact

In times of disruption, there are often winners and losers. The Dow Jones fell around 4% while the S&P500 experienced significant volatility through the conflict, but is only 5% down from all-time highs. Despite the level of volatility, markets have remained quite resilient. That's to be expected since pre-conflict growth looked strong and companies remained healthy.

Winners: Energy

The Energy Select Sector SPDR ETF (XLE) is trading at $57.70 as of 15 March, up approximately 29% over the past 12 months. XLE recorded its two largest monthly inflows on record in January ($2.6bn) and February ($2.0bn) as investors positioned ahead of hostilities. Year-to-date, oil commodities and thematic energy ETFs have attracted around $8.4bn of inflows. Exxon Mobil and Chevron have seen significant stock price gains as they benefit from record-high crude prices.

Winners: Defence and Shipping

The defence sector has been a clear beneficiary, with Morgan Stanley recommending increased exposure to defence, security, aerospace, and industrial resilience themes where government spending can drive multi-year demand. The Breakwave Tanker Shipping ETF (BWET) is currently the world’s best-performing non-leveraged ETF, with year-to-date returns nearing 200%, capturing the surge in crude oil tanker freight rates amid severe disruptions to maritime logistics.

Losers: Technology

The tech sector is bearing the brunt of rising yields. NVIDIA, Microsoft, and Apple have all seen meaningful market capitalisation contractions as the 10-year Treasury yield surge triggers multiple rounds of compression. Growth stocks that rely on external financing are particularly vulnerable, as the cost of capital rises precisely when valuations are stretched. The Nasdaq’s sensitivity to the discount rate makes it the most exposed major index to bond-market repricing.

Emerging Markets: Concentration Risk Exposed

The iShares MSCI Emerging Markets ETF (EEM) fell more than 5% in a single week at the start of the conflict. The key vulnerability is concentration: roughly 80% of broad EM investable indices are tied to Asia, with a 30%+ weighting in the tech sector. Energy-import-dependent economies like South Korea, where energy-intensive semiconductor manufacturing fuels the AI boom, are acutely exposed.

The iShares MSCI South Korea ETF (EWY) dropped nearly 13% in a single week, with the KOSPI registering its worst single-day fall ever before a government-mandated stabilisation fund triggered a rebound. SK Hynix (up 274% in 2025) and Samsung (up 125%) saw sharp reversals. By contrast, Latin American EM exposures, linked to energy and commodity exports, have served as a natural hedge. Strategists at Global X have recommended a “barbell approach,” balancing exposure to Asian tech with exposure to Latin American commodities. Global X

The Bond Market: An Unconventional Crisis Response

In a typical geopolitical shock, investors flee to the safety of government bonds, pushing yields down. This time, the opposite has occurred. The 10-year US Treasury yield surged from a 27 February low of 3.97% to 4.28% by 12 March. Bonds are selling off because this is an inflationary shock - higher inflation expectations mean bondholders require more yield to compensate for purchasing power erosion. In these times, bonds are not a safe haven.

Talking about safe havens, we see investors selling off gold, too. This is due to many thinking gold is currently overvalued. Investors are now investing in the dollar, driven by safe-haven flows and the hawkish repricing of Fed rate expectations.

Conclusion

The US-Iran war has produced the largest oil supply disruption in history and has fundamentally reshaped the macro and market landscape. The stagflation risk is real: inflation is being repriced higher while growth is being revised lower, and central banks face an impossible choice between accommodating the inflation and risking recession.

For equity investors, the sector rotation is pronounced and may persist for months even if the conflict resolves quickly. For bond investors, the safe-haven playbook has been inverted by the inflation trade. For fund managers, the simultaneous move across equities, gilts, currencies, and inflation expectations demands an integrated review of asset-liability management, hedging, and de-risking strategies.

What is clear is that the era of predictable, low-volatility macro conditions has ended. Geopolitical risk is now a persistent driver of economic value, and investors need to allocate accordingly.

DISCLAIMER

This commentary is produced by RNEquityInsights for informational purposes only and does not constitute investment advice. All data referenced is sourced from public reporting, including the IEA, CNBC, Bloomberg, Global X, and Reuters. Past performance is not indicative of future results. Readers should consult a qualified financial advisor before making investment decisions.