Dire Straits: The Iran Conflict and Oil Markets
Author: Pulkit Sabharwal
March 4, 2026
Oil prices are expected to remain volatile for as long as the U.S./Israel war with Iran continues to escalate, but just how high they rise may largely depend on the degree to which energy infrastructure in the Middle East is targeted in attacks going forward and whether this leads to significant disruptions in supply.
Granted, taking out Iran’s production capability doesn’t seem to be the modus operandi of the U.S. and Israel for now. In their attacks to date, the focus has been first on military sites, air defences and nuclear facilities, and then secondly on clearing out missile launchers. In total, U.S/Israel forces claim to have hit more than 2,000 targets, none of which has been energy infrastructure. We believe this is a strategic imperative intended to prevent retaliatory attacks on energy infrastructure in other parts of the Middle East, as well as to limit the threat of market contagion from taking hold.
Iran, meanwhile, seemed to be following the same playbook with its early attacks aimed primarily at military assets rather than energy infrastructure. Interestingly—and perhaps not coincidentally—it also targeted tourist spots (e.g., luxury hotels and airports), suggesting a greater willingness to disrupt “non-oil” drivers of the Middle East regional economy as one of its priorities.
But that doesn’t mean Iran is steering clear of actions that could disrupt energy markets. In more recent days, it has begun targeting energy-related transportation and logistical hubs, and some debris hit a refinery and the Fujairah oil field in the United Arab Emirates. This may up the ante for Washington, which is currently navigating political pressures related to the cost of living in the United States. In particular, it could potentially undermine the low price of gasoline that has served to blunt stubborn inflationary pressures seen in other consumer items. With U.S. midterm elections approaching, President Donald Trump might not have the wiggle room to let oil prices spike much higher without intervening.
The Islamic Revolutionary Guard Corps (IRGC), a major branch of the country’s armed forces, has also been warning shipping traffic not to use the Strait of Hormuz, bringing activity along one of the world’s key shipping routes for oil and liquefied natural gas to a standstill.
Clearly, this is a significant development. A fifth of all global oil flowed through this waterway in 2024, and even the threat of attacks on ships passing by seems enough to re-route traffic. Yet we believe that a prolonged halt in traffic is unlikely. In our opinion, that owes to technical difficulties, but it also reflects a global consensus that doing so would be bad business for everyone involved. Indeed, the Strait of Hormuz has never been fully closed—even during full-blown wars that occurred in the region before this one—and the overwhelming presence of U.S. naval forces in the region gives us reason to believe this time will be no different.
Ultimately, we believe heightened price volatility in oil prices is here to stay in the near term, but we are less concerned about extreme price spikes over time. While the conflict is no doubt a fluid situation, it is also true that the Middle East region depends greatly on oil and gas revenues. Shutting down business for long does not seem feasible, not only for the U.S. allies in the region but Iran as well.
That said, in a scenario where Iran is willing to actively target energy infrastructure as well as shipping in both the Strait of Hormuz and the Red Sea (via Yemen), oil prices could easily rise above US$100 a barrel. In this scenario, it’s likely that the U.S.-Israel response will be to reopen the strait with naval assets or offer a backstop for traffic looking to navigate these waters, while targeting Iran’s refineries. By taking such action, the U.S and Israel can potentially limit any potential disruption in global crude supply, while also ensuring that Iran’s fuel supply is eliminated.
Indeed, from an investor perspective, this tactic is precisely what Ukraine has been doing to Russia and could give a further boost to refiners globally should it be deployed.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
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