Bianca Botes, Director at Citadel Global
Two weeks into Operation Epic Fury has seen the global energy market swing between severe supply shock and brief relief, before returning to renewed pressure. The question asked by markets last week was, “How high will oil prices go?” This week, the question has shifted to a more difficult one: “How long will they stay at these elevated levels”
The price escalation
Brent crude entered the conflict at roughly $60/barrel. In the first week of fighting, United States (US) crude climbed 36% while Brent rose 28%. By 8 March, both benchmarks had crossed $100/barrel for the first time since Russia’s 2022 invasion of Ukraine, with Brent briefly approaching $120/barrel in early Monday trading.
A sharp reversal followed on Tuesday – Brent’s largest single-day decline since March 2022 – settling at $87.80/barrel. The drop came after comments from United States (US) President, Donald Trump, suggesting the war would end “very soon,” along with Saudi Aramco’s announcement that it would resume roughly 70% of shipments through its pipeline to Yanbu.
The relief lasted less than a day. By Wednesday Brent had returned to over $100/barrel, despite the announcement by the International Energy Agency (IEA), of the release of 400 million barrels, the largest strategic oil reserve release in history.
This is because, the underlying global supply picture has barely changed. Tanker traffic through the Strait of Hormuz has fallen to single digits – or zero – each day for more than a week, compared with roughly 50 daily shipments before the conflict. The disruption has already suspended roughly 20% of global crude and natural gas supply, as Tehran targets shipping in the Strait and energy infrastructure across the region.
A near-complete shutdown of the waterway has forced the region’s major producers – Saudi Arabia, the United Arab Emirates (UAE), Iraq and Kuwait – to suspend shipments totalling as much as 140 million barrels per day destined for global refiners.
Gas markets face similar disruptions. Qatar declared force majeure on its exports after Iranian drone strikes damaged its gas plants and sources indicate that normal production may take at least a month to restore. Qatar supplies around 20% of global Liquid Natural Gas (LNG). Meanwhile, Saudi Aramco’s Ras Tanura oil refinery and export terminal has also been shut.
The IEA’s reserve release: Scale without substance
While it’s the largest coordinated release ever, the IEA’s release of 400 million barrels of oil and refined products from strategic reserves only covers around 15-20 days of the usual oil flow lost supply from the Strait of Hormuz’s effective closure.
Despite the US releasing 172 million barrels beginning next week and Japan committing 80 million barrels from its private and national reserves, market reaction was telling. Oil prices still climbed above $100/barrel, because the release addresses the symptom rather than the cause. As the IEA’s executive director acknowledged, what ultimately matters is the reopening of the Strait of Hormuz.
Analysts have also been direct. One strategist at ING noted that only military de-escalation can sustainably lower oil prices. Another described the IEA action as “a water pistol rather than a bazooka,” given Iran’s capacity to escalate disruptions – including laying naval mines – which would deepen the crisis.
The Islamic Revolutionary Guard Corps (IRGC) stated on Wednesday that vessels linked to the US, Israel, or their allies would be considered legitimate targets and warned oil could reach $200/barrel. Whether that price level materialises remains uncertain, but the risk cannot be dismissed.
Even if hostilities ease soon, reopening supply through the Strait to normal traffic could take one to three months due to the time required to ramp up production and repair infrastructure damage.
Inflation: The knock-on effect
An oil shock of this scale feeds rapidly into inflation. Energy costs influence transportation, manufacturing inputs and food production. Fossil fuels account for as much as 80% of fertilizer production costs, while fuel represents 40% to 50% of the variable cost of growing crops.
With Iran, Qatar, Saudi Arabia, Bahrain, and the UAE among the world’s largest producers of fertilisers, the Strait of Hormuz is also a key route for fertiliser exports: roughly one-third of global supply passes through it, meaning the conflict will hit agriculture with a second blow.
February inflation readings across major economies reflected a world that no longer exists. If oil prices remain near current levels, US CPI could climb from 2.4% to roughly 3% by year-end, reversing recent disinflation progress. In the eurozone, officials warn inflation could exceed 3% if Brent remains around $100/barrel and gas prices stay elevated, while economic growth could slow to about 0.8%.
The United Kingdom (UK) faces an additional vulnerability, with its gas reserves (along with Germany and France) having fallen back toward lows seen early in the Russia-Ukraine war, leaving the system more sensitive to disruptions and amplifying price volatility. UK CPI, previously expected to fall to 2.1% by year-end, is now forecast to be closer to 2.7%.
In South Africa, a 9% month-on-month fuel price increase in April, alone, could push CPI to about 3.3%, reversing the expected disinflation and placing the South African Reserve Bank’s (SARB’s) 3% anchor under pressure before the next Monetary Policy Committee (MPC) meeting.
Across all of these economies the broader dynamic is the same. Higher oil prices represent a supply shock that simultaneously raises inflation while slowing growth, leaving central banks without an easy policy response.
Interest rate outlook
Monetary policy has become more complicated across the globe at once. Central banks that were preparing to cut interest rates must now reconsider inflation risks they did not anticipate, while growth outlooks remain fragile.
In the US, the Federal Reserve (Fed) meets on 18 March with markets pricing in a roughly 95% chance of no change. The earliest plausible rate cut is now expected September, compared with earlier expectations of mid-year easing. The probability of no cuts at all in 2026 has risen from about 6% to nearly 16%.
The Fed faces a familiar dilemma: tightening to contain inflation risks will weaken growth, while easing to support the economy risks will worsen price pressures. After the post-COVID inflation misjudgement, policymakers are reluctant to dismiss new inflation risks too quickly.
The Bank of England (BoE) faces a similar challenge. A March rate cut is now unlikely, with any April move dependent on a clear easing of geopolitical tensions. With UK inflation already stickier than in other major economies and the country highly exposed to natural gas prices, policymakers have little room to manoeuvre. If the energy shock persists, scenarios involving rate hikes above the current 3.75% cannot be ruled out.
The European Central Bank (ECB) enters the situation from a more favourable starting point. Inflation had only just reached the 2% target before the conflict began. The key question is whether the shock remains confined to energy – where interest rates have limited influence – or spreads into wages and services. The probability of an ECB rate hike in 2026 has risen from 12% to around 42%, reflecting how quickly the risk landscape has shifted.
South Africa’s MPC meets on 26 March. At the beginning of the year the debate centred on when the SARB would cut rates – March or May. That conversation has flipped entirely. Forward rate agreements now imply roughly a 24% chance of a 25-basis-point hike at the March meeting.
A local 10% to 20% fuel price increase expected in April may still keep headline CPI below 4%, giving the SARB room to hold rather than hike. However, that depends on the rand stabilising and oil prices not rising further. Higher gold prices provide some fiscal support but do little to offset the cost of fuel imports or the inflation burden on households.
Globally, rate cuts later in 2026 remain possible, but the conditions that previously made them likely no longer exist in their original form.
What to watch:
The next two weeks may shape the economic outlook for the rest of 2026. Three factors to watch are:
- The Strait of Hormuz: Each day the waterway remains effectively closed extends the supply deficit that no reserve release can fully offset. Any credible signal that traffic is resuming would move markets faster than policy announcements.
- Upcoming central bank meetings: The Fed on 18 March, followed by the BoE and the ECB on 19 March, and the SARB on 26 March. All will meet in a geopolitical environment radically different from the one they expected just weeks ago.
- March inflation readings: Due in early April across most major economies. These will provide the first hard data capturing the full pass-through from the oil shock. Until those figures arrive, central banks are operating with limited information and markets are pricing scenarios rather than outcomes.
The base case, which remains possible, is that the conflict eases within weeks and allows energy flows to normalise. But it is no longer the only scenario that needs to be considered.
The week’s key themes
- Swift shift in interest rate expectations send global bond yields soaring
- Sell-off on Wall Street drags S&P 500, Nasdaq and Dow to their lowest closes since November
- European natural gas prices soar over 60% for the month
- Dollar set for its second straight week of gains, while the rand faces volatile swings
Bonds
Treasury yields pushed higher again on Thursday, with the 10-year note reaching 4.25% – a cumulative move of around 13 basis points over the previous two sessions. The driver is the Iran war. The country’s new supreme leader, Mojtaba Khamenei, has doubled down on keeping the Strait of Hormuz shut, signalling the conflict is far from over and that additional attack fronts may be opened. That rhetoric is keeping oil prices elevated and inflation expectations firm, while separately, bond investors are increasingly uneasy about the US fiscal trajectory as defence spending climbs. The Fed meets next week and a hold on interest rates is essentially a foregone conclusion. Now markets are looking at how policymakers will frame the outlook.
UK gilts have sold off sharply, pushing the 10-year yield above 4.60% for the first time since mid-October. The culprit is a repricing of BoE rate expectations, driven by the same energy shock rattling markets globally. The IEA’s pledge to release 400 million barrels from reserves has done little to shift sentiment. Markets now put the odds of a December BoE hike above 50%, a complete reversal from where pricing sat just last week. Today’s UK GDP print will be watched closely for any further read on the UK’s resilience.
Germany’s bund yields have hit 2.95%, a level not seen since October 2023, as $100/barrel oil prices became a reality following Iran’s latest strikes on regional energy infrastructure. The ECB rate path has been redrawn almost entirely. A July hike is now fully priced in, with an 85% chance of a second by December. That’s a world away from late February, when traders were still debating whether the ECB might be cutting rates before year-end.
South African bonds came under pressure this week, with the 10-year yield climbing to around 8.72%. The sell-off accelerated as rising Middle East tensions pushed oil prices higher, lifting inflation concerns and weighing on the rand, prompting investors to demand a wider risk premium on local debt. The SARB is reworking its risk scenarios ahead of the 26 March MPC as the conflict complicates the inflation outlook, reinforcing the cautious tone in bonds.
Indices
Wall Street futures crept higher this morning, offering a tentative breather after Thursday’s bruising session where sell-off was broad and decisive – the Dow lost 1.56%, the S&P 500 shed 1.52%, and the Nasdaq slid 1.78%, dragging all three indices to their lowest closes since November. The catalyst was oil, which surged after Iran’s new supreme leader Mojtaba Khamenei committed to keeping the Strait of Hormuz shut as US and Israeli strikes on Iran continue. Eight of 11 S&P sectors finished in the red, with industrials, consumer discretionary, and healthcare bearing the brunt. Attention now turns to January’s Personal Consumption Expenditure (PCE) Index – the Fed’s preferred inflation gauge – due out later today, alongside the first revision to fourth quarter GDP and March consumer confidence. The PCE data predates the Iran conflict, so its market impact may be limited, but any upside surprise on inflation would do little to improve sentiment.
The FTSE 100 slipped 0.5% to 10,305 on Thursday, a second consecutive day of losses as the same inflationary pressures battering global markets weighed on London. Khamenei’s threat to target all US military bases in the region if they remain operational added another layer of geopolitical anxiety. Banks were the hardest hit – HSBC dropped 6.1%, compounded by an ex-dividend move and a broker note flagging its Middle East exposure, while Barclays, Standard Chartered, Lloyds and NatWest all fell between 2% and 5%. Rate-sensitive housebuilders and airlines followed suit. Bucking the trend, defence and energy names held firm – BAE Systems gained 3.1%, BP added 3% and Shell rose 2.6%, while pest control and hygiene services company, Rentokil Initial, jumped 5.2% on a UBS (global financial services company) upgrade.
Frankfurt’s DAX 40 ended yesterday marginally lower at 23,590, down around 0.2%, with the geopolitical noise from the Middle East continuing to set the tone. Again, banks were under particular pressure – Deutsche Bank fell 5.4% after its annual report revealed a €26 billion private credit exposure and a potential $1 billion litigation risk, with Commerzbank not far behind, falling 3.9%. On the brighter side, online fashion retailer, Zalando, surged over 10% on the back of a €300 million share buyback, re-insurance company, Hannover Re, gained 4.9% on a dividend increase and energy company, RWE, rose 4.3% after reporting solid 2025 results alongside an ambitious expansion strategy.
The JSE All Share Index drifted lower yesterday, falling 0.38% to around 116,948 on Thursday – a move that, in isolation, looks modest but sits within a broader pattern of softness. The index is down just over 3% over the past month, reflecting the risk-off mood that has weighed on emerging markets through the week. With global investors turning defensive amid elevated oil prices and sustained geopolitical tension, local equities have struggled to find a foothold and Thursday’s session did little to shift that dynamic.
Commodities
Brent crude is holding around $100/barrel, consolidating a sharp two-day rally that has reshaped the energy market’s near-term outlook. The driver remains the Strait of Hormuz, which Iran’s new supreme leader Mojtaba Khamenei has committed to keeping effectively closed – and with tankers unable to load Gulf cargo since the conflict began earlier this month, the consequences are tangible. Roughly 20% of global oil trade has been removed from circulation, forcing GCC members to slash production by 10 million barrels per day as onshore storage fills up. The IEA has called it the largest disruption in oil market history. Adding to the uncertainty, day 13 of the war saw both US President, Donald Trump and Iran’s Supreme Leader, Mojtaba Khamenei strike uncompromising tones – the former reiterating that stopping Iran having nuclear weapons matters more than oil costs, the latter vowing to hold the Strait and threatening to widen the conflict.
European gas futures pushed further toward €52/mega-watt hour on Thursday, extending a rally that has now seen prices surge over 60% this month alone. The Middle East conflict has severed a critical artery of LNG supply as QatarEnergy suspended operations at facilities accounting for roughly 20% of global output, UAE exports remain largely halted and suspected Iranian drone strikes on three vessels near the Strait of Hormuz on Wednesday deepened fears of a prolonged disruption. Europe’s reliance on US LNG – already elevated following the pivot away from Russian gas – has intensified as competing buyers chase the same limited supply. The bloc is scrambling for a policy response, with a potential price cap among the options under discussion. The backdrop makes uncomfortable reading: EU storage sits below 30%, nearly 20% lower than a year ago, leaving the continent with limited buffer against further shocks.
Gold recovered to around $5,110/ounce, on Thursday, after two days of losses, as the geopolitical risk premium reasserted itself. The precious metal, however, is on track for back-to-back weekly losses.
Currencies
The US Dollar Index is holding its ground above 99.5, on course for a second straight weekly gain as safe-haven demand continues to underpin the currency. Two weeks into the Iran conflict, there is little in the rhetoric from either Tehran or Washington to suggest de-escalation is imminent and markets are positioning accordingly. Surging oil prices are adding a secondary tailwind, with inflation concerns pushing back the expected timing of the next Fed rate cut from July to September.
The euro has extended its slide toward $1.15/€, touching its weakest level since late November, as the dollar’s safe-haven bid and eurozone inflation concerns combined to pressure the euro. Oil’s push above $100/barrel following Iran’s latest strikes on regional infrastructure has forced a rapid reassessment of the ECB’s rate path. Money markets now fully price a hike by July, with an 85% probability of a second by December.
The pound has slipped to $1.338/£, consolidating near the three-month lows, hit last week, as Middle East uncertainty is keeping UK inflation fears mounted. The energy shock is driving a meaningful repricing of BoE expectations – markets now assign greater than 50% probability to a 25-basis point rate hike in December, a sharp turnaround from as recently as Wednesday when no move was expected. Today’s monthly UK GDP figures will provide the next read on whether the UK economy is well-placed to absorb the pressure building from higher energy costs and tightening financial conditions.
The rand has had a turbulent week, with Monday setting the tone. The rand/dollar exchange rate briefly spiked to R16.9203/$ intraday – a three-month low – as the oil shock and broad risk-off sentiment swept through emerging market currencies. The move proved sharp but not sustained: the rand clawed back ground through midweek, trading to a high of R16.13/$, stabilising in the R16.30/$ to R16.49/$ range, before renewed pressure from elevated oil prices and persistent geopolitical uncertainty pushed it back toward R16.77/$. The pattern this week has been one of headline-driven volatility rather than a clean directional trend. The R16.92/$ print looks like the high-water mark of that first stress reaction, but with oil anchored around $100/barrel and risk appetite still fragile, the rand has few near-term catalysts to mount a meaningful recovery.
*Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 16.87
EUR/ZAR: 19.31
GBP/ZAR: 22.35
BRENT CRUDE: $101.97
GOLD: $5,073
ENDS
