Iran war roils energy markets, inflation fears resurface

Iran's Kharg Island oil terminal has ceased all shipments over the past several days, marking the first prolonged halt since the conflict began. Simultaneously, the US reported April CPI of 3.8% YoY, the fastest pace since early 2024, driven by rising gasoline and grocery costs. These two data points have rekindled stagflation fears and undermined the narrative that inflationThe rate at which prices rise across an economy. has peaked. Oil prices are holding near $85-$86 per barrel, and Brent remains elevated despite broader equity market momentumThe empirical fact that winners keep winning over the medium term., signalling that traders are pricing in supply scarcity and geopolitical premium.

The ECB's Joachim Nagel stated that the probability of rate hikes due to the Iran war is rising, a direct challenge to the market consensus that central banks are on a rate-cut path. This signals that geopolitical shocks can override cyclical disinflation expectations. Russia is also absorbing energy shocks: the country expects flat oil output in 2026 as drone attacks target key infrastructure, and Kazakhstan is cutting Caspian exports due to supply disruptions. European refinery margins are under pressure as supply tightens and demand remains robust.

Energy importers face margin compression, while defence names and commodities-linked equities benefit from elevated risk premium. Currencies of commodity exporters like Canada and Australia could strengthen if oil and metals prices hold. However, the upstream question is whether stagflation (high inflationThe rate at which prices rise across an economy. plus weak growth) will force central banks into an impossible policy corner: hiking rates to combat inflation while global growth stalls on energy constraints. This is the bear case for risk assets, including equities and crypto.

The counter-argument is that the supply shock is temporary: sanctions enforcement is uneven, and some Iranian oil may flow through grey channels. Additionally, global oil demand is modest relative to OPEC capacity, so supply rationalisation could stabilise prices quickly. Ray Dalio and other strategists are betting that inflationThe rate at which prices rise across an economy. will peak in May or June, implying that the current shock is a transient spike and not a structural shift. The coming weeks of CPI data will determine whether the stagflation narrative gains credence or fades.