Global markets reacted swiftly to the February 28 military strikes by the U.S. and Israel against Iran.
In the first wave of volatility, global equities declined while gold and oil prices moved higher.
Iran retaliated with strikes on U.S. and Israeli bases across the Middle East, intensifying uncertainty for investors worldwide.
A key area of focus emerged on March 1, when tanker traffic through the Strait of Hormuz—a vital waterway linking the Persian Gulf to global markets—came to a standstill. The shutdown temporarily halts flows of crude oil, LNG and refined products.
Investors are now evaluating how the evolving conflict could influence energy supplies—particularly crude oil—the global economy and asset prices. The possibility of further regional escalation, how Iran’s leadership succession may unfold and the potential duration of elevated tensions as among the most pressing questions.
Oil Supply Appears Stable
Continued disruption in the Strait of Hormuz is a critical consideration for global oil markets. The Strait is responsible for the transit of roughly 20% global oil trade, 20% of the world’s LNG and 5 million barrels per day (mb/d) of refined products. While alternative routes exist, they can accommodate only a fraction of these volumes.
Historically, the Strait has experienced temporary disruptions during regional conflicts but has never closed entirely.
“Any disruption to transport through the Strait can have substantial impacts to global energy markets and prices,” says Devin McDermott, Morgan Stanley’s Head of North American Energy Research. “While history is a helpful guide in how this might ultimately play out, there is still a lot of uncertainty around how the regional conflict will progress over the coming days and weeks.”
A prolonged closure would also damage Iran’s own economic interests. The country produces approximately 3.3 mb/d of crude oil and exports around 1.6 mb/d, mostly to China—volumes that rely on open shipping lanes. The U.S. military’s sizable regional presence, including naval assets dedicated to protecting maritime transit, may help support continuity of flows.
In the meantime, however, OPEC+ announced a supply increase of 206,000 barrels per day. According to Morgan Stanley Oil Strategist Martijn Rats, markets are likely to focus less on the quota adjustment and more on the deliverability of incremental barrels—especially from core producers like Saudi Arabia and the United Arab Emirates.
“In practice, the quota change on paper will not stabilize markets. The question is how much sustained, deliverable spare capacity exists and how quickly additional barrels can be moved into the export system,” Rats says.
Importantly, markets were signaling comfort with the levels of global oil supply prior to the strikes. The latest U.S. Weekly Petroleum Status Report showed a sizable 16 million barrel increase in crude inventories, signaling no immediate tightening in supply.
“Geopolitics aside, underlying market fundamentals are soft as the physical market appears well supplied,” Rats notes.
Equity Markets Maintain Resilience
The energy sector remains the strongest performer in the S&P 500 year to date, up 25%, supported by firming oil prices and attractive valuations. The sector trades at a 42% discount to the broader index.
McDermott notes that shares of upstream producers, integrated oil companies and refiners could benefit if oil prices continue to rise, though those gains may be offset by higher freight costs.
“We recommend sticking with what's working: remain defensive with a quality bias amid this period of heightened volatility,” McDermott advises.
Historically, geopolitical shocks have not led to prolonged downturns in U.S. equities. From the Korean War in the 1950s to Russia’s invasion of Ukraine in 2022, the S&P 500 has delivered average gains of 2%, 6% and 8% over one, six and twelvemonth periods following such events, based on Morgan Stanley and Bloomberg data.
Morgan Stanley Chief Investment Officer and Chief U.S. Equity Strategist Mike Wilson highlights that the probability of a bear case scenario for equities would materially increase if there were a substantial and sustained spike in oil prices—on the order of 75% to 100% year over year in a late cycle backdrop. Even then, Wilson’s view of today’s early cycle environment—with earnings accelerating—provides an important buffer.
“Unless oil prices spike in a historically significant manner and remain elevated, recent events are unlikely to change our bullish view on U.S. equities over the next six to 12 months,” Wilson says.
