The intensifying conflict between Israel and Iran has sent ripples through global oil markets, driving up tanker chartering costs and crude prices amid fears of potential supply disruptions. As geopolitical tensions mount, the interplay of shipping dynamics, oil production risks, and macroeconomic effects is shaping a cautious yet volatile market response.

Surging freight rates and slowed ship bookings

The conflict has significantly impacted oil tanker chartering from the Middle East to Asia. According to industry sources cited by Reuters, freight rates for very large crude carriers (VLCCs) on the Middle East Gulf (MEG) to Japan route surged over 20% following initial escalations, stabilizing at W55 on the Worldscale measure. For clean products like gasoline and diesel shipped west of the Suez Canal, freight rates have risen from $3.3-$3.5 million to as high as $4.5 million. Ship bookings have slowed as charterers and traders adopt a wait-and-see approach, with some shipowners withholding vessels from Gulf routes until the situation clarifies. This caution has created opportunities for voyages from the Far East and northwest India, according to Sentosa Shipbrokers.
The Strait of Hormuz, a critical chokepoint for 18-19 million barrels per day of oil and oil products, remains open, but analysts warn that continued escalation could drive freight rates higher. Cargo insurance premiums may increase by $3-$8 per barrel if attacks target Middle East oil infrastructure, adding further costs to global trade.

Oil price spikes & geopolitical risks

Data analysis shows that oil prices jumped up to 12% after Israel’s strikes on Iran’s nuclear facilities and a major oil terminal in Tehran. Iran produces 3.3 million barrels per day of crude, with 2 million exported, but Saudi Arabia and the UAE’s spare capacity of over 3.5 million barrels per day could mitigate disruptions. The price spike reflects broader concerns that the conflict could escalate, potentially leading to Iranian attempts to close the Strait of Hormuz or attack neighbouring oil facilities.

Historical precedents suggest that geopolitical shocks often cause short-lived oil price increases. Research from the European Central Bank highlights a “risk channel” where markets price in potential supply disruptions, raising the convenience yield of oil contracts. For example, Brent crude rose 5% after 9/11 and 30% after Russia’s 2022 invasion of Ukraine, but prices fell within weeks as demand concerns outweighed supply fears. A longer-term “economic activity channel” often dampens prices by reducing global investment and consumption, according to the ECB.

Limited macroeconomic fallout expected

Despite immediate market jitters, the broader economic impact of the conflict may be contained unless significant supply disruptions occur. Federal Reserve Bank of Dallas research indicates that even a 1973-scale oil supply shock would reduce global economic output by only 0.12%, as oil price uncertainty is distinct from wider macroeconomic risks. Historical events, such as the 1980s Tanker War—where over 200 tankers were bombed in the Strait of Hormuz—saw oil prices stabilize after initial spikes. Global equity markets also tend to recover quickly from geopolitical shocks, with the IMF noting only modest, short-term declines in most cases since World War II, except for the 1973 oil embargo.

Outlook: cautious outlook amid uncertainty

The Israel-Iran conflict has heightened short-term risks, pushing up oil shipping costs and prices while slowing trade activity in the Gulf. However, spare production capacity in Saudi Arabia and the UAE, combined with the historical resilience of oil and equity markets, suggests that severe, lasting disruptions are not yet anticipated. Much depends on the conflict’s duration and escalation, particularly regarding the Strait of Hormuz and regional oil infrastructure. For now, markets remain on edge, balancing immediate risk premiums with the expectation that global supply chains and economies can adapt to all but the most extreme scenarios.