Tensions in the Middle East and the prospect of renewed U.S. military action against Iran risk driving crude prices higher and slowing the pace of central bank easing, analysts at Capital Economics said.
The consultancy noted that U.S. forces have increased their presence in the region and that President Donald Trump warned Iranian officials that any failure to agree to a new nuclear deal could prompt an attack "far worse" than a prior American strike last year. Representatives from the United States and Iran met in Switzerland earlier this week, but Iran's foreign minister was quoted as saying that no agreement appears imminent.
Media reports have suggested that Gulf states, which have typically maintained close ties with the U.S. administration, are working to dissuade further strikes on Iran. Nevertheless, Capital Economics analysts Jason Tuvey and Simon Macadam told clients that the prospect of a strike has "clearly risen," citing a recent uptick in Brent crude prices to levels near $70 per barrel.
The firm highlighted Iran's significance to global oil supplies, noting the country produced 4.7 million barrels per day last year, roughly 4.4% of worldwide output. Geography also matters: Iran sits astride the Strait of Hormuz, a key transit route through which about one fifth of global oil flows pass. Those factors inform the analysts' view of how supply disruptions could feed through to markets.
Capital Economics assessed potential price paths under different scenarios. If the United States were to carry out strikes, the analysts estimate Brent could jump to around $80 a barrel. They added that if critical energy infrastructure were damaged or if Iran moved to close the Strait of Hormuz, prices could rise further - to about $100 per barrel under their scenarios.
The analysts also examined the inflationary consequences of higher oil costs. They flagged that a 5% year-on-year rise in oil prices would typically add roughly 0.1 percentage point to average inflation in advanced economies. Given already elevated services inflation in many countries, this additional energy-driven inflation could influence central bank decisions on policy easing.
On central bank reactions, Capital Economics wrote: "The one 25-basis point cut by the Fed, two by the ECB, and three by the Bank of England that we expect this year would be delayed or not happen at all." The note also addressed Japan, saying that because of the renewal of energy subsidies, higher oil prices would hit government finances rather than consumers - a development that could "possibly intensify pressure on" Japanese government bonds.
The analysis links a geopolitical risk - the chance of U.S. strikes on Iran - directly to oil market outcomes and to the potential for slower-than-expected monetary easing in major economies. The analysts emphasize that both the physical importance of Iran in oil production and the strategic geometry of the Strait of Hormuz underpin their conclusions.
Uncertainties remain around diplomatic talks and the intentions of the parties involved. Capital Economics' projections of $80 and $100 per barrel outcomes rest on the scenarios described above and the degree of disruption to supplies.