Energy markets moved decisively higher as conflict in the Middle East targeted critical gas infrastructure, intensifying a supply shock already disrupting global markets. Brent crude surged past $115 a barrel early on Thursday, with U.S. West Texas Intermediate trading at a substantial discount to Brent - roughly $97 a barrel - influenced in part by releases from U.S. strategic reserves.
The recent price spike followed an attack by Israel on Iran's South Pars natural gas field - the world's largest - which prompted retaliatory strikes by Tehran on gas facilities across the region, including strikes against Qatar's Ras Laffan energy complex. Those actions triggered a sharp repricing across energy markets, with European natural gas benchmarks rising again and overall gas prices in Europe up about 107% since late February.
Market participants also reacted to central bank communications. The Federal Reserve left policy rates unchanged but delivered what markets read as a hawkish message. Chair Jerome Powell noted that the conflict had introduced significant uncertainty and the Fed raised its full-year inflation forecast. After the Fed's decision, futures markets adjusted, and traders no longer priced in a rate cut in 2026.
Other central banks signalled similar caution. The Bank of Canada and the Bank of Japan kept policy on hold and indicated they were prepared to raise rates further if higher energy costs translated into persistent inflation. The European Central Bank and the Bank of England were due to announce decisions later in the day, both confronting the same uncertain outlook for inflation as the Iran conflict unfolds.
Equities reacted quickly to both the energy shock and the more hawkish central bank tone. Major U.S. indexes closed down more than 1% on Wednesday after the Fed kept rates steady and projected only a single rate cut this year. Global equity markets moved lower on Thursday morning as well: Japan's Nikkei fell more than 3%, South Korea's KOSPI dropped about 2.8%, and European bourses were also trading down. Wall Street futures were slightly higher ahead of the U.S. open.
Inflation dynamics in the United States already showed signs of warming ahead of the energy shock. Producer prices in February rose 3.4% - the largest monthly increase in seven months and notably above consensus forecasts. That backdrop likely informed central bank caution, as higher wholesale costs can translate into elevated consumer inflation.
Currency and commodity markets reflected the shifting risk environment. The dollar strengthened on the Fed's hawkish signals while the Japanese yen weakened, nearing its lowest level in two years. Gold declined on the firmer dollar, falling to its weakest level since February 6.
Natural gas remained particularly volatile amid the tit-for-tat attacks on gas infrastructure. European benchmark gas prices jumped sharply on Thursday, reflecting immediate concerns about supply disruption in a region where winter storage and gas flows are closely monitored. The renewed supply risk pushed European gas prices substantially higher compared with late February.
Not all market moves were driven by geopolitics. In technology, Micron Technology reported a strong second-quarter revenue gain driven by demand for AI memory chips and provided a third-quarter revenue forecast that exceeded expectations. Despite the upbeat revenue figures, Micron's shares fell about 5% after hours after the company disclosed plans to increase capital expenditures by $5 billion for 2026 - a level of spending that some investors viewed with caution.
Beyond immediate market reactions, policymakers face acute uncertainty. As Federal Reserve Chair Powell acknowledged, "nobody really knows how big this will be and how long it lasts." Reports also indicated that the U.S. administration was reportedly weighing the option of deploying ground troops to the Middle East, adding another dimension of unpredictability to the economic outlook.
Investors and policymakers will be watching a packed calendar for further signals on the economic response to the energy shock. Key events include interest rate decisions by the European Central Bank (9:15 AM EDT) and the Bank of England (8:00 AM EDT), U.S. weekly jobless claims and the Philadelphia Fed March business surveys (both at 8:30 AM EDT), a U.S. 10-year TIPS auction (1:00 PM EDT), and corporate earnings from Accenture and FedEx. In addition, a diplomatic meeting was scheduled between Japanese Prime Minister Sanae Takaichi and U.S. President Donald Trump.
Contextual note - Markets face heightened volatility as energy supply concerns intersect with central bank policy paths. The immediate market response has been broad, affecting oil and gas directly but also transmitting to equities, currencies, and precious metals through inflation and rate expectations.