As the US-Israel conflict with Iran enters its second week, the human cost continues to be devastating. While we all hope to see a swift de-escalation and an end to the suffering, the conflict is also continuing to impact global financial markets.
Crude oil prices have surged more than 25 percent, with West Texas Intermediate (WTI) crossing above 100 dollars a barrel for the first time in over three years.
The jump in prices has quickly reignited global inflation concerns, prompting G7 nations to discuss the coordinated release of emergency oil reserves to calm markets.
Why is the US-Israel Iran conflict pushing oil prices higher?
The closure of the Strait of Hormuz, through which nearly one fifth of global oil supply flows, together with large production cuts across the Middle East, has created the sharpest spike in energy prices since the pandemic-driven shock of 2020.
Episodes of heightened geopolitical tension have the potential to ripple through markets well beyond the energy complex.
For investors, these events can influence inflation expectations, bond yields, interest rate outlooks, and relative performance across asset classes.
Understanding these linkages is essential not just for managing day-to-day volatility, but also for positioning portfolios as the macro environment shifts.
Why rising oil prices could push inflation higher
Rising oil prices feed directly into broader consumer prices through transportation, manufacturing, and utility costs. With wholesale gas already surging, the risk of renewed inflation pressure is real.
Analysts now expect inflation could climb back toward five percent by mid-year, reversing much of the progress made in 2025 when global energy prices were more stable.
This renewed inflation threat complicates the policy path for central banks that had been preparing to ease monetary conditions.
How the Iran conflict could change interest rate expectations
Bond markets have reacted swiftly to changing rate expectations.
UK government bond yields have moved sharply higher, with the two-year gilt rising to 4.15 percent, the highest level since 2025.
The Bank of England, which has held rates at 3.75% since February, meets again on 19 March. But markets are now expecting a less than 5% chance of a rate cut in March and are pricing one interest rate increase for the rest of 2026.
Before the conflict began, traders had priced an 80 to 90 percent probability of a March rate cut, followed by gradual declines to around 3.25%by year end.
That outlook has changed dramatically.
Several Monetary Policy Committee members, including Taylor, now emphasise a ‘wait and see’ stance, warning that prolonged energy shocks could require rates to stay higher for longer or even move above 4%to tame persistent inflation. Lenders have already started responding by raising mortgage rates.
Which stock markets and sectors could benefit from higher oil prices?
While the bond market has repriced for a ‘higher-for-longer’ interest rate environment, equity investors face a more mixed picture.
Oil-sensitive sectors like airlines, manufacturing, and logistics companies are likely to experience pressures on profits as fuel and input costs rise.
These increases often pass through to consumers in the form of higher prices, further reinforcing inflationary pressures.
However, indices with heavier exposure to energy producers, such as the FTSE 100, may benefit from higher oil prices.
The FTSE 100includes several large oil, gas, and mining groups that tend to perform well when commodity prices strengthen.
At the same time, the US dollar has risen as investors seek ‘safe-haven’ currencies amid heightened geopolitical risk, adding additional complexity for non-dollar investors.
3 ETF ideas for investing during rising oil prices and market volatility
For those seeking to reduce volatility and preserve capital, increasing exposure to overnight ETFs can offer some more stability with the potential to potentially earn attractive yields.
The Amundi Smart Overnight Return ETF is one example.
This ETF aims to achieve short-term returns higher than the benchmark rate SONIA with extremely low volatility. SONIA stands for ‘Sterling Overnight index Average’, and is the average interest rate banks lend money to each other overnight.
The ETF can help offer a ‘safer’ place to keep money, with the possibility of a little more growth than a more traditional savings account might offer.
For investors with a higher risk appetite who wish to position for potential further gains in the energy sector, the iShares Oil and Gas Exploration and Production ETF offers diversified exposure to approximately 100 companies globally involved in the upstream energy business.
This option may appeal to those who believe oil and gas equities will continue to perform strongly as higher prices boost profitability across the sector.
A balanced middle ground can be found through broader equity exposure that still benefits from energy strength, but carries less concentrated risk.
The iShares FTSE 100 ETF could fit this role, as roughly 18 percent of its holdings are in oil, gas, and mining companies.
This allows investors to participate in potential sector gains while maintaining exposure to other large UK businesses across finance, healthcare, and consumer industries.
How investors can navigate market volatility during geopolitical crises
In short, the current geopolitical landscape has reawakened many dynamics that seemed dormant over the past year: energy-driven inflation, shifting rate expectations, and renewed market volatility.
It means portfolio flexibility and careful risk management remain crucial as this situation unfolds and policy responses evolve.
Markets will likely remain volatile as geopolitical uncertainty, energy prices, and monetary policy (interest rates and money supply) collide.
So maintaining diversification, balancing defensive assets with selective exposure to sectors that could benefit, and understanding how instruments behave under stress will help investors navigate the months ahead with both prudence and being aware of opportunities.
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