Hormuz Flows Drop 30%; Iran War Threatens to Durably Raise Oil and Energy Inflation

The US-Israel military campaign in Iran has triggered one of the most severe energy shocks of the past decade, with far-reaching implications for global inflationThe rate at which prices rise across an economy. and geopolitical risk. Flows through the Strait of Hormuz, the world's most critical oil chokepoint, fell by nearly 6 million barrels per day in Q1 2026, a nearly 30% decline from normal levels. Tanker transit patterns show diversions into longer sea routes, undercover passages, and outright avoidance, behavior unseen since the 1980s Iran-Iraq War. The supply shock has lifted Brent crude above $75 per barrel and created secondary cascades across aviation, chemicals, and power generation.

Central banks globally are responding to the inflationThe rate at which prices rise across an economy. impulse. Turkey's central bank revised its year-end inflation target to 24%, explicitly citing the Iran war's effect on oil prices. The European Central Bank signaled that if crude-price shocks begin deanchoring inflation expectations, rate hikes are back on the table, threatening the dovish pivot markets priced in earlier this year. The US 30-year Treasury yield hit 5% for the first time since 2007, a signal that long-durationBond price sensitivity to interest rate changes. investors are demanding compensation for persistent inflation and potential stagflation risks. Gold retreated on rising real rates, while energy importers like India, Turkey, and the Philippines burned through foreign exchange reserves to defend their currencies.

Operational impact is immediate and severe. Air New Zealand warned of a full-year loss due to jet-fuel cost spikes. Qantas is pressuring Air New Zealand by adding capacity on routes where fuel economics are deteriorating. Oil tanker companies and refiners dependent on Hormuz transit are repricing risk premiums, while shipping indices have spiked. Hunt Oil's CEO called the conflict a "nightmare scenario," and Indian oil officials have asked the US to extend waivers on Russian crude imports to offset the Iranian supply loss. Energy importers face margin compression; defense names and companies with pricing power benefit from the risk premium embedded in rates and spreads.

The question now is whether the conflict reaches a negotiated settlement or escalates further. Trump and Xi met in Beijing to discuss trade and energy cooperation, with markets watching for any signals on Iran sanctions relief or Strait stabilization talks. If the war persists through 2026, oil could remain elevated, forcing a permanent shift in monetary policy and energy sector allocations.