Geopolitical tensions, especially in the Middle East, could disrupt energy markets and push oil prices sharply higher. However, markets have historically rebounded quickly from such shocks, with fundamentals remaining the key long-term driver.
Market reaction
A general risk-off tone has returned to markets, although the overall equity market reaction has so far (up to June 20) been muted, with stocks focusing instead on macroeconomic data and central bank meetings. Investors have sought refuge from geopolitical uncertainty in traditional safe havens, although notably, there has been a greater rally in gold, Japanese yen, and Swiss franc than in the U.S. Treasury market and the U.S. dollar.
Recently, oil prices have recorded one of the sharpest rises in the past 30 years, jumping more than 20% in a week and surpassing $70 per barrel. Even so, as of June 20, oil remained below its 2024 average of $80 and is meaningfully below the levels reached in previous geopolitical shocks.
However, it is worth noting that if the conflict escalates further, threatening disruption to the flow of oil, there could be additional sharp and sustained upward pressure on energy prices.
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