Iran conflict and the implications for oil and other commodities

By Malcolm Melville, Fund Manager – Energy, Schroders

The recent escalation in the Middle East implies supply disruption and risk of higher prices for commodities.

Prior to the events of this weekend, oil was cheap by historical standards at mid $60s per barrel (bbl). Inventories were high and oil market participants were not expecting events that would push oil prices higher. The consensus for the rest of this year was that oil prices would fall.

In the wake of the attacks, oil prices have risen. The Iranian response has been broader and more aggressive than in past incidents, such as last year’s 12-day war in June which saw prices spike to $78/bbl and then quickly reverse.

Strait of Hormuz critical for numerous commodities

A key difference now is that the Strait of Hormuz – one of the world’s most critical shipping chokepoints – appears virtually closed. There have been attacks on vessels in the area, as confirmed by UK Maritime Trade Operations. This creates a more complex and fragile dynamic than in previous short-lived episodes.

The strait is a narrow and highly exposed passage through which flows approximately:

A prolonged disruption would therefore affect multiple commodity markets, not just crude oil. A key question is how long the current conflict might last. President Trump has mentioned a four-week timeframe.

Sourcing alternative oil supply unfeasible

If the shipping via the Strait of Hormuz remains impaired for a long period, sourcing replacement oil supply will be extremely difficult. OPEC has announced a 200,000 barrels per day (b/d) increase but this is immaterial relative to the scale of potential disruption.

Iran produces 3.4 million barrels per day and exports 1.7 million b/d, largely to China – these are the flows that are most immediately at risk. China may seek to replace these with Russian oil, which is otherwise subject to sanctions. Another factor to watch is if India begins buying Russian oil again.

Disruption to shipping via the Strait of Hormuz would impact Saudi Arabia’s ability to export oil. Saudi Arabia exports 7–7.4 million b/d and could theoretically reroute volumes via its East–West pipeline. However, the pipeline has never operated at full capacity before and this would also require re-routing shipping, which would take time.

There is also the issue that Saudi exports are already close to their maximum levels. It seems unlikely that they have much flexibility to increase these, even if they are able to export via the pipeline rather than the Strait of Hormuz.

Saudi Arabian exports close to maximum

^{Source: Bloomberg, Schroders; Bloomberg – March 2026.}

The US is not in a position to supply more oil to replace barrels held up by disruption. US shale growth has stalled and top-tier acreage is increasingly depleted. Even higher prices would not generate an immediate supply response given capital discipline and high investment hurdles.

Annual change in US oil production

^{Source: Bloomberg, Schroders – February 2026. Shown for illustrative purposes only and not a recommendation to buy or sell.}

In short, if the strait remains disrupted, there is no credible source of rapid replacement supply, leaving the market exposed to a meaningful deficit.

Oil prices likely to climb higher if conflict persists

If disruption persists for several weeks, oil prices are at risk of accelerating sharply higher. Each additional week of impairment would likely increase market concern about sustained supply loss. A longer-lasting disruption could drive prices toward extreme historical levels.

Our estimates suggest that if access to the Strait of Hormuz is restricted for a period of four to five weeks, the oil price could rise to levels around $100-$120/bbl. If the conflict is prolonged for months, we could see prices rise above previous all-time highs, up to $150-$200/bbl.

Prolonged higher oil prices could spark second wave of inflation

David Rees, Global Head of Economics at Schroders, said “A brief spike in oil prices would have little lasting effect on inflation. Energy prices would need to be sustained higher over weeks or months before we see it push CPI meaningfully higher. However, higher sustained energy inflation would squeeze real incomes, weigh on growth and raise doubts about whether central banks, such as the US Federal Reserve, can continue easing monetary policy.”

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