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Markets have moved quickly over the past week as the conflict involving the United States, Israel and Iran has intensified. The key issue for investors is not just the military escalation itself, it is the risk that the conflict disrupts the flow of oil and gas through the Persian Gulf and the Strait of Hormuz, one of the world’s most important energy bottlenecks.

Reports across the week point to attacks on tankers, pressure on regional energy infrastructure and growing concern around how long supply disruptions could last.

That matters because energy remains central to the global economy. Roughly one-fifth of the world’s oil supply moves through the Strait of Hormuz. Any sustained disruption has the potential to push oil prices higher, increase freight and insurance costs and feed inflation expectations globally.

Oil prices have already responded sharply. At the time of writing, Brent crude has risen above US$108 per barrel, while U.S. crude briefly traded above US$111. The move reflects growing concern that supply disruptions could persist and tighten global energy markets further.

The market reaction has extended beyond oil. Global equities have turned more cautious, the U.S. dollar has strengthened and investors have become more focused on inflation and interest rate implications. Economists are now openly discussing the risk that higher energy prices could weigh on growth while adding to inflation pressure if the conflict drags on.

The Impact on Australians

For Australia, the immediate issue is more likely to be price pressure rather than physical shortages.

Reuters reported Australia currently holds approximately 36 days of petrol, 34 days of diesel and 32 days of jet fuel reserves, the highest level in more than a decade. The federal government has indicated there is no immediate threat to the domestic supply.

However, if the conflict persists, higher global energy prices would still filter through to the local economy via fuel costs, freight costs and broader inflation pressure. Diesel-intensive industries such as mining, agriculture and transport would be particularly exposed.

Australia’s position in global energy markets also creates a two-sided effect.

On the negative side, higher oil prices translate directly into higher petrol prices and transportation costs. Estimates suggest a US$10 increase in oil prices can add roughly 10 cents per litre, placing pressure on household budgets.

On the positive side, Australia is one of the world’s largest LNG exporters. Higher global gas prices can therefore support export revenues, government receipts and earnings for domestic energy producers. This dynamic helps explain why parts of the Australian energy sector may benefit even as higher fuel costs weigh on the broader economy.

What Investors Should Watch

The key issue from here is whether disruption in the Strait of Hormuz proves temporary or sustained. Markets can absorb a short shock. A longer disruption that materially restricts physical supply would be more significant.

Investors should also watch whether oil remains around current levels or continues pushing higher. Some market commentary is already pointing to scenarios above US$120 per barrel if the conflict persists, while Gulf energy exporters have warned that a prolonged escalation could place broader regional exports at risk.

Gas markets are equally important. Qatar is one of the world’s major LNG exporters and sends almost all of its LNG through the Strait of Hormuz. Any sustained disruption there would tighten supply conditions and add to inflation concerns globally.

Investors should also keep a close eye on inflation expectations and central bank thinking. Higher energy prices feed into transport, freight and broader input costs, which can complicate the rate outlook and weigh on risk appetite across equity markets.

The BPC view

Oil prices have moved higher, volatility has increased and inflation sensitivity has returned to the forefront of markets.

For investors, this highlights how geopolitical shocks tend to transmit through financial markets via energy prices, inflation expectations and risk sentiment. Energy markets and inflation expectations remain the most important signals to watch as the situation develops.

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