Brace for impact: With Iran in crisis, markets fear $100-a-barrel oil

There is no easy way to shape our words on what happened over the past two days. As the markets approached the end of the working week, it took just a couple of hours to experience a shocking 'cold plunge' effect. US and Israeli forces launched an attack on Iran, a development that many had anticipated, but it took an unexpected turn following a week of fluctuating negotiations.

The climax happened at the end of the day - Iran’s Supreme Leader Ayatollah Ali Khamenei, who shaped the Islamic Republic for more than three decades, has been confirmed dead after a joint military strike by the United States and Israel. Iranian state media, along with multiple international sources, reported the announcement this Sunday, triggering mourning at home and heightened anxiety across markets and capitals alike.

What began as an escalation over Iran’s nuclear programme and regional proxy activities has exploded into a confrontation with far-reaching implications. As Tehran declared a period of 40 days of public mourning, its Revolutionary Guard vowed “severe punishment” against the alleged attackers, suggesting a prolonged cycle of retaliation could unfold.

Khamenei, 86, led Iran since 1989, consolidating power through the Supreme Leader’s office and overseeing the expansion of the Islamic Revolutionary Guard Corps (IRGC) as both a military and political force. His death, confirmed after strikes that reportedly hit his central Tehran compound and killed several senior figures, leaves a power vacuum at the heart of the Republic without an obvious successor.

Alireza ?Arafi, a religious leader on the Guardian Council, has been appointed to ?Iran’s leadership council, the body tasked with fulfilling the ?supreme leader’s role until the Assembly of Experts elects a new leader.

?Arafi will be ?part of the ?temporary leadership council alongside President Pezeshkian ?and Supreme Court Chief Justice Mohseni-Ejei.

Domestically, reactions are fractured. Some Iranians mourn, while others celebrated in diaspora communities, underscoring deep divisions over the clerical establishment and its policies.

The timing of Khamenei’s death in combination with ongoing military operations has renewed intense focus on the Strait of Hormuz, a narrow waterway through which roughly 20% of global oil exports normally transit. Analysts warn that any effective disruption to traffic, whether through formal closure or de facto avoidance, would reverberate violently through energy markets, tightening supply and pushing prices sharply higher.

Energy consultancy Rystad Energy has estimated that if operations disrupt shipping through Hormuz, 8–10 million barrels per day of oil could be removed from markets even if alternative regional pipelines run at full tilt, potentially lifting Brent crude prices by $20 per barrel upon the resumption of trading.

With Brent crude already trading around the low $70s before the weekend shock, traders are bracing for significant volatility as exchanges reopen. Countries dependent on imported energy, from Europe to East Asia, face higher costs for heating and industry if supply fears deepen.

Global reaction and rising risk premium

World leaders have responded unevenly. Russia and China condemned the strike as a violation of international law, while Western capitals have stressed restraint but reaffirmed support for counter-proliferation objectives, a delicate diplomatic position aimed at containing escalation.

The United States has not signalled an imminent release from its Strategic Petroleum Reserve, a move that some analysts interpret as an expectation that price impacts may be manageable or short-lived, while others see it as a bid to temper panic. Publicly, the U.S. Department of Energy has stated that such releases are not under consideration “at this stage.”

Across the Middle East, markets and governments are preparing for a possible wider conflagration. Protests have already erupted in Pakistan and Iraq following the news of Khamenei’s death, underscoring the broader regional volatility that could accompany any prolonged cycle of reprisals.

As stock exchanges prepare to reopen, several factors are in focus:

Oil price direction: With the possibility of a supply shock if Hormuz is effectively impassable, market participants will be watching Brent and WTI benchmarks closely.

OPEC+ response: Member countries are expected to convene soon to discuss production targets. Any coordinated increase in output could only partially offset potential disruptions in the Gulf.

Risk premium: Traders will increasingly price in geopolitical risk, which historically has been a significant driver of crude prices during Middle East crises.

The global balance between supply and demand was already under pressure from slower growth, pipeline capacity constraints, and LNG market shifts. Adding acute geopolitical tension at one of the world’s most vital chokepoints is likely to strengthen the risk premium in energy prices, at least in the near term.

A world on alert

For investors, businesses and policymakers, Monday’s market open will be a barometer not just of price movements but of confidence. Iran’s sudden leadership transition, triggered amidst active hostilities, has thrust the Persian Gulf back to the centre of global energy geopolitics. How economic actors respond to this moment will reverberate through commodity markets, currency valuations and international relations in the weeks ahead. Perhaps the initial or current situation in the market could provide insight into whether the conflict will conclude.