Oil and Middle East crisis: how much do wars affect crude markets?

The latest military escalation in the Middle East has once again placed oil at the center of global market tensions. In recent days, crude prices have surged sharply: Brent climbed above 105 dollars per barrel, with peaks beyond 110, while WTI approached 120 dollars during the most volatile trading sessions. According to analyses published by Reuters and CNBC, the move has been largely driven by the so-called “geopolitical risk premium”, the extra price that markets assign when they fear disruptions to energy supply.

The main concern relates to the stability of production in the Persian Gulf and, above all, the security of the Strait of Hormuz, the maritime corridor through which roughly one fifth of the world’s oil supply passes. Any threat to shipping in this area can trigger immediate reactions in oil prices.

However, the current dynamic is not an isolated case. Historical data show that many geopolitical crises have produced similar effects on energy markets. During the Gulf War in 1990, for example, oil prices surged while the S&P 500 recorded a maximum drawdown close to 16%. Similar patterns were observed during the Iraq War in 2003, the Libyan revolution in 2011 and, more recently, after Russia’s invasion of Ukraine in 2022.

In general, when oil prices rise due to geopolitical tensions, stock markets tend to react negatively. Higher energy costs fuel inflationary pressures and increase production expenses for companies and industries. Nevertheless, history also shows that the impact on equity markets is often temporary: once the true scope of the conflict becomes clearer, market volatility tends to ease.

It is important to note that wars are not the only factor capable of pushing oil prices higher. The price of crude is influenced by three main variables: geopolitics, OPEC decisions and the global economic cycle. Production cuts by exporting countries, or strong growth in global demand, can sometimes have an even greater impact than military shocks.

In the current crisis, however, the dominant factor is clearly geopolitical risk. Market participants fear that a broader conflict could directly involve some of the region’s key producers, potentially reducing global supply and triggering a new phase of volatility in energy markets. For now, oil remains suspended between two opposing scenarios: a rapid de-escalation that would bring prices back to more moderate levels, or a prolonged conflict capable of keeping crude firmly above 100 dollars per barrel.

Andrea Pelucchi