Oil crossing $100 per barrel for the first time in four years has pushed stagflation to the top of the agenda for investors, with markets falling overnight as the Iran war shows no sign of abating.
Brent crude surged as high as $119.50 a barrel when Asian markets opened on Monday, before settling around $107 to $108. West Texas Intermediate followed a similar trajectory. Both benchmarks were trading near $60 a barrel in January, meaning oil has roughly doubled in price in 10 weeks.
“Today’s shock thus looks like a negative supply shock, combining inflationary pressure with an economic slowdown,” Edmond de Rothschild Asset Management said in a note published Monday.
“For investors, this is a worst-case scenario as it rekindles stagflation fears. Rising prices are coupled with slowing growth so monetary authorities and governments have less leeway.”
The primary driver is the effective closure of the Strait of Hormuz, through which approximately a fifth of global oil and liquefied natural gas supplies normally pass. The strait has been largely impassable for more than a week following Iranian threats on tankers.
Iraq has cut production by 70% at its three main oilfields. Kuwait, the UAE and Qatar have all curtailed output as Gulf storage reaches capacity. Saudi Arabia has been intercepting drone strikes targeting its Shaybah oilfield and rerouting crude through its Red Sea terminal at Yanbu.
Iran’s appointment of Mojtaba Khamenei as supreme leader over the weekend shifted market expectations toward a longer conflict. The Iranian politician and Shia cleric is the son of previous supreme leader Ali Khamenei, who was assassinated at the start of the ongoing 2026 Iran war.
US president Donald Trump has said the appointment is “unacceptable” and suggest he should be involved in the choosing of Iran’s new leader.
Neil Wilson, UK investor strategist at Saxo, said the move was the key development.
“It’s a sign of continuation of Iran’s hardline approach and indicates that the war will be more prolonged than financial markets had assumed last week,” he said.
“Complacency has been replaced by a degree of panic because the market is now pricing in a more sustained hit to energy and trade flows.”
Iran produces approximately 10,000 drones per month, Wilson noted, giving it the capacity to sustain pressure on shipping lanes for an extended period.
Equity markets fell sharply on Monday. Derren Nathan, head of equity research at Hargreaves Lansdown, said: “Save for the VIX, investors in global stock markets are staring at red screens this morning.”
Overnight, Japan’s Nikkei dropped 5% and South Korea’s Kospi fell 6%; trading on the latter was briefly halted by a circuit breaker. In Europe, the FTSE 100 opened down 1.75%, with the DAX and CAC 40 each falling 2.5%. US futures pointed to losses of around 1.5%.
The VIX – a measure of implied US volatility, known as Wall Street’s fear index – jumped to 34.7, its highest level since the Liberation Day volatility spike in April 2025.
The concern among analysts is not the oil price in isolation but the combination of effects it triggers. Edmond de Rothschild estimates that a $15 rise in oil prices adds 1 percentage point to inflation in developed economies while removing 0.3 to 0.4 percentage points from global GDP growth.
Royal Bank of Canada has estimated US inflation could reach 3.7% if oil holds at $100 per barrel. RSM calculates that oil at $125 a barrel could cut US GDP by 0.8% even as inflation exceeds 4%.
Susannah Streeter, chief investment strategist at Wealth Club, said: “The worsening situation in the Middle East has the potential to bring a toxic combination of shocks to economies.
“The concern is that governments lack the financial firepower, given high debt levels, to deliver meaningful support to companies and consumers.”
Despite that, markets are pricing in rate hikes. Swaps markets now assign approximately a 70% probability to a Bank of England rate increase this year, with the ECB similarly expected to tighten. Before the conflict, both the Fed and the Bank of England had been expected to cut rates twice in 2026.
The two-year gilt yield rose 27 basis points on Monday, its largest single-day move since the Liz Truss crisis.
The Fed is now not expected to move until September at the earliest. Friday's US non-farm payrolls figure added to the pressure, coming in 92,000 below expectations, a signal of labour market softening at a time when inflation fears are rising.
Some analysts have drawn comparisons with the 1970s oil shocks. Wilson acknowledged the parallel but noted its limits.
“The global economy is a lot less dependent on the price of a barrel than it was then – oil intensity has declined steadily since the 70s. But clearly there are fears of a global economic slowdown and inflation crisis which is roiling global markets after a weekend of further escalation in the Middle East war,” he said.
“The 1970s crisis led to the 80s bull market – will it also create the roaring 20s bull market? For the moment, financial markets are concerned about a 1970s-style stagflation situation first. But these geopolitical events have a tendency to create opportunities, if your time horizon is long enough.”
Edmond de Rothschild puts a 50% probability on a prolonged war of attrition, 30% on rapid regime change, which it considers positive for risk assets, and 20% on a risk-of-chaos scenario involving lasting disruption.
Goldman Sachs has warned that crude and refined products could reach all-time highs if Hormuz flows remain depressed through March. Westpac projects oil at $185 per barrel if disruption continues for three months.
On portfolio positioning, analysts are broadly aligned: exercise caution in the near term, prioritise diversification and avoid reactive selling.
Adrian Murphy, chief executive of Murphy Wealth, said: “In times like these, there are some evergreen principles that apply. Whether it has been double-digit inflation, financial crises or a global pandemic, markets have proven resilient. Dealing with uncertainty is one of the reasons investors earn a return over time – and, as the old adage goes, it is about time in, rather than timing, the market.
“Many investors consider selling their investments during periods of uncertainty and holding cash until there is more stability. But that is just another form of market timing and has proven to be self-defeating – downturns are often followed by periods of strong growth, for example after the tariffs uncertainty last year.”
Edmond de Rothschild said it is taking profits on its government bond overweight and plans to increase its allocation to risk assets once conditions become clearer.
On gold, Hargreaves Lansdown’s Nathan noted that the yellow metal’s safe-haven role is being complicated by broad deleveraging and the repricing of rate expectations.
Meanwhile, Saxo’s Wilson noted that the sell-off has triggered a rotation out of positions that had led markets earlier this year, including overweight Europe, Asia and emerging markets, and that these may not reassert themselves quickly even if the conflict ends.
Wealth Club’s Streeter offered the longer perspective: “History has shown that after previous conflicts around the world, markets have recovered but it can take considerable time and patience.”