Oil Markets on Edge as Israel-Iran Tensions Raise Inflation, Fed Policy Risks — Evening Brief – 06.16.25
Oil prices have climbed following Israel’s strike on Iran last Friday, but remain within the year-to-date range, as investors weigh the geopolitical risk premium against actual supply disruptions. Markets are currently pricing in an estimated $10 per barrel geopolitical premium, despite no direct hit to global oil supplies so far.
Still, with roughly 30% of global seaborne crude passing through the Strait of Hormuz, any escalation could significantly tighten the energy market. Some estimates project oil could surge to $140 per barrel if Iran moves to shut the strait. Analysts expect only modest upside in the near term, with sentiment turning more bearish by the fourth quarter. Notably, a wave of call option buying on Friday pushed the put/call ratio to near 25-year extremes, a disproportionate move relative to the spot oil price reaction.
“Previous spikes have been associated with recessions in the US,” warned Dr. Ed Yardeni, President of Yardeni Research, Inc. “If Iran shuts the Strait of Hormuz, the price could soar, but there would likely be a swift response by the US and our allies to reopen the strait by obliterating Iran’s naval forces.” In a less extreme scenario—such as a 50% reduction in Iranian exports—oil prices are likely to stay around current levels, Yardeni added, suggesting markets are pricing in this restrained risk case.
The broader concern is that a sustained rise in energy prices could push headline inflation higher—at a time when tariff-related pressures are also looming. While May’s U.S. inflation print showed modest increases, many economists caution that the impact of both tariffs and geopolitical shocks could take several months to surface in official data.
“The conflict has the potential to generate some additional angst about the health of the consumer, the broader economy, and the path of the Fed, a narrative shift that seems likely to be problematic for stock prices,” strategists at RBC Capital Markets wrote in a note.
Attention now turns to this week’s Federal Reserve meeting. The Fed is widely expected to hold its benchmark rate steady, but investors will scrutinize Chair Jerome Powell’s remarks and the updated Summary of Economic Projections for any shift in outlook. Key to watch: whether Fed officials have adjusted inflation or growth forecasts in light of rising energy prices and renewed geopolitical volatility.
Meanwhile, the 10-year U.S. Treasury yield ended last week at 4.41%, roughly in the middle of its 2025 range. Whether rates remain anchored amid these cross-currents—or break higher—will be a key test of investor risk appetite in the days ahead.