Risks of conflict in Iran to the global economy

Starting from February 28, air strikes by the US and Israel and the response from Iran began to spread heat into global economic activities. Concerned about safety, most ships carrying oil and other products have stopped circulating in the Strait of Hormuz.

Mr. Warren Patterson, Head of Commodity Strategy at investment bank ING (Netherlands), pointed out that 20 million barrels of oil and more than 100 billion m³ of liquefied petroleum gas (LNG) are transported through here each year, accounting for 20% of the total global LNG trade.

“The more ships hesitate to pass through this strait, the greater the impact on the oil and gas market,” he said.

Monday morning (March 2), Brent oil price increased about 8.5%, to more than 79 USD per barrel. ING forecasts that oil prices may soon trade around 80-90 USD. Even reaching the $100 mark as risks increase further and the worst-case scenario is $140, in the event of a significant and prolonged oil supply disruption.

Gas prices in Europe and LNG in Asia could also be highly volatile, due to disruption risks from Qatar, amid tight capital markets. If supply from Qatar is interrupted for a long time, the reference price in the Netherlands (TTF) could skyrocket to the region of 80-100 euros per MWh (equivalent to 28-35 USD per MMBtu).

With the risk of rising energy prices, William Jackson, chief emerging markets economist at Capital Economics, predicts a prolonged conflict is likely to add 0.6-0.7 percentage points to global inflation.

In particular, Europe will suffer a greater impact on inflation than the US, due to the closer geographical location of oil and gas fields in the Strait of Hormuz area, according to Mr. Tariq Dennison, asset management consultant at GFM Asset Management based in Zurich (Switzerland).

Mr. Frantisek Taborsky, ING’s EMEA (Europe, Middle East and Africa) Forex & Financial Strategist, forecasts that Türkiye is most vulnerable to inflation, with a 10% increase in oil prices pushing CPI up by 1.1 percentage points. Next are Romania and Hungary.

Not only disruptions in the Strait of Hormuz, many airlines canceled flights through the Gulf, immediately affecting travel and transportation activities.

Middle East airports, including Dubai – the world’s busiest international hub – and Doha, were closed for a third consecutive day, leaving tens of thousands of passengers stranded. According to B Riley Securities, flight disruptions (due to airspace and airport closures) are likely to reduce travel demand in the region.

Independent aviation analyst Brendan Sobie in Singapore said Indian airlines are greatly affected due to the high frequency of flights to this region. Air India has canceled flights connecting India and Zurich, Copenhagen, Birmingham, UAE, Saudi Arabia, Israel and Qatar.

According to VariFlight, Chinese airlines have canceled 26.5% of trips to and from the Middle East in the period 2 – 8/3. Cathay Pacific cancels all orders until further notice. Singapore Airlines stops arriving in Dubai until March 7. Japan Airlines temporarily suspends operation of the Tokyo – Doha route.

Analysts say rising fuel costs, flight cancellations and rerouting costs are the main pressures on airlines. In the morning session of March 2, tourism stocks plummeted. TUI shares – Europe’s largest tourism group, dropped 7% at the beginning of the session. International Airlines Group – owner of British Airways, down 9%. Lufthansa and Air France-KLM both decreased by 7%.

Shares of Accor hotel and cruise line Carnival Corporation went down. Asian airlines such as ANA Holdings, Air China, China Southern Airlines, China Eastern Airlines, AirAsia X, China Airlines and EVA Airways decreased by at least 4%.

Airline disruptions even affect the physical gold market, as this precious metal cannot be transported from Dubai to Switzerland, Hong Kong and India. “It seems like most airlines have canceled flights so there won’t be any gold shipped in the next few days,” the source said. Reuters said.

Business people believe that the impact on global gold supply will depend on the duration of the disruption. In the immediate future, operations in other physical gold trading centers such as China, India, New York, London and Zurich are still fine.

The price of this precious metal will increase but not too dramatically, according to Tariq Dennison at GFM Asset Management. “It’s possible that gold will increase slightly in the short term, but the price already reflects geopolitical instability at its maximum level,” he said.

According to analysts, there are other potential risks to the global economy from the conflict in Iran. First is the subjective psychology in the market, which believes that the spillover impact from this conflict will be limited, similar to the “12-Day War” in June 2025. Then there is uncertainty about what will happen next in Iran, given the complexity of its ruling system.

That makes the oil price trend – which has been rising for many weeks – more unpredictable, because it depends on the reaction of producing countries and how much transportation activities through the Middle East are disrupted. This development may also affect the safety of the bond market, which was previously considered a haven asset.

Rong Ren Goh, bond investment manager at Eastspring Investments in Singapore, said it’s uncertain whether buying US Treasuries at this time is a good trade, especially if oil prices spike and cause inflation.

According to this expert, risks in the Middle East have increased. “Markets will have to reprice from a geopolitical shock to a regime risk shock, with the possibility of protracted conflict and not just retaliation, unless Iran announces it wants to negotiate,” he said.