The global oil market is currently experiencing significant upward pressure, with Brent crude oil seeing an approximate 20% increase so far in June, positioning it for its largest monthly jump since 2020. This surge is primarily driven by escalating tensions between Israel and Iran, echoing past energy price shocks, such as the one following Russia's invasion of Ukraine three years prior, which dramatically fueled global inflation and prompted aggressive interest rate hikes worldwide. Despite the rise being relatively contained compared to previous spikes, its implications for world markets are a focal point for investors and economists.

While oil prices have crept rather than surged dramatically, avoiding widespread panic due to the absence of noticeable interruptions to oil flows, a closer examination reveals underlying concerns. The premium of the first-month Brent crude futures contract over that for delivery six months later recently reached a six-month high. This indicates that investors are increasingly pricing in the heightened probability of supply disruptions originating from the Middle East. Currently trading around $77 a barrel, oil remains below its 2022 peak of $139 but is rapidly approaching critical "pain points." Experts, such as ABN AMRO Solutions CIO Christophe Boucher, warn that if oil prices stabilize within the $80-100 range, it poses a significant threat to the global economy.

Supply shock remains a primary concern for traders, with keen attention paid to shipping routes, which serve as crucial energy bellwethers. Approximately one-fifth of the world's total oil consumption transits through the narrow Hormuz Strait, situated between Oman and Iran. Analysts predict that any significant disruption to this vital waterway could easily propel oil prices beyond the $100 mark. Compounding this risk is the fact that while OPEC+ nations have pledged an additional 1.2 million barrels per day, none of this promised supply has yet been shipped or delivered. Should shipping routes face blockages, this anticipated supply would be effectively withheld from the international market. Nadia Martin Wiggen, director at hedge fund Svelland Capital, closely monitors freight rates, noting that China, possessing the world's largest spare refining capacity, has not yet commenced panic buying. Wiggen suggests that "Once China starts to buy, freight rates will rise, and world’s energy prices will follow," signaling a potentially more volatile phase.

The implications of rising oil prices extend broadly, threatening both near-term inflation and global economic growth by diminishing consumer spending power. Economists frequently describe high oil prices as a form of "tax," particularly burdening net energy importing nations such as Japan and those across Europe, given the short-term difficulty in substituting oil. Samy Chaar, chief economist at Lombard Odier, estimates that sustained oil prices exceeding $100 a barrel could reduce global economic growth by 1% and concurrently boost inflation by 1%. The launch of an Israeli strike on Iran a week prior further heightened market unease; an initial rally in safe-haven bonds quickly receded as focus shifted to the inflationary consequences of costlier oil. This was reflected in the euro zone's five-year, five-year forward inflation gauge, which climbed to its highest point in nearly a month. In the United States, RBC chief economist Frances Donald projects that sustained $75 oil could increase the CPI forecast by about half a percent by year-end, pushing it from 3% to 3.5%. The adverse effects of rising crude prices are expected to be most pronounced in heavily oil-importing countries like Turkey, India, Pakistan, Morocco, and much of Eastern Europe. Conversely, oil-supplying nations, including Gulf countries, Nigeria, Angola, Venezuela, and to some extent Brazil, Colombia, and Mexico, are poised to see a boost to their national coffers.

A notable shift is occurring in the behavior of the U.S. dollar. Historically, the dollar tends to strengthen when oil prices rally, but its support from the recent oil surge has been limited, with only a 0.4% weekly gain. Analysts anticipate a resumption of the dollar’s downward trend, attributing this to current expectations of contained Middle East risks and an underlying bearish sentiment towards the currency. The dollar has already weakened by approximately 9% this year against other major currencies, influenced by global economic uncertainty and concerns regarding the reliability of the U.S. administration as a trading and diplomatic partner. Crucially, a weaker dollar helps alleviate the financial burden of higher oil prices for importing nations, as oil is priced in dollars. As UniCredit observed, "For oil-importing countries, the dollar’s fall offers some relief, easing the impact of soaring oil prices and mitigating wider economic strain."

Despite the geopolitical turmoil surrounding oil, world stock markets have largely remained near all-time highs, reflecting a degree of investor complacency in the absence of a severe oil-supply shock. Osman Ali, global co-head of Quantitative Investment Strategies at Goldman Sachs Asset Management, suggests that "Investors want to look past this until there’s a reason to believe this will be a much larger regional conflict." While Gulf markets initially experienced a sell-off following the news, they subsequently stabilized, benefiting from the higher oil prices. In contrast, U.S. and European energy shares, particularly oil and gas companies, have shown strong outperformance, as have defence stocks. Israeli stocks notably led the market, climbing 6% in a week. Conversely, sectors heavily reliant on oil consumption, such as airlines, have been the most adversely affected. Recent market data indicates that Brent crude closed at $78.85, with U.S. WTI at $77.20, as the conflict between Israel and Iran escalated further, including reports of Israel targeting Iranian nuclear sites. This intensification adds a geopolitical risk premium of about $10 to prices, with some analysts forecasting Brent could top $90 even without a full-scale regional war, especially if the critical Strait of Hormuz is impacted, potentially driving prices to $120–$130.