The recent Israeli strikes on Iranian territory have triggered serious concerns over a potential broader conflict in the region, with possible global consequences. According to global credit insurer Coface, the escalation risks igniting a chain reaction that could affect oil prices, global inflation, and the direction of monetary policy, thereby threatening financial stability worldwide.

Volatility on Energy Markets

In the immediate term, markets are already showing signs of nervousness. The attacks have caused oil prices to jump, as investors rush to safe-haven assets. The situation remains fluid, but any long-term disruption in the Strait of Hormuz - the main artery for oil transit from the Gulf - could deal a severe blow to energy markets. With over 20 million barrels of crude oil and refined products passing through the strait daily, and a large share of global liquefied natural gas (LNG) exports relying on this route, any blockages could drive prices sharply upwards.

Escalation Scenarios and Regional Risks

Coface outlines several risk scenarios. One of the primary concerns is that the Israeli strikes, which this time targeted key military and nuclear infrastructure, could provoke a larger regional conflict. Unlike previous incidents that were contained, the current situation could spiral, especially given political instability in both Israel and Iran and the increasingly limited capacity of the U.S. administration to restrain its Israeli partner.

The worst-case scenario could see Iran retaliating against American assets in the Middle East if Tehran becomes convinced of direct U.S. involvement. Already, Washington has evacuated non-essential personnel from several bases in the region, signaling elevated threat levels. Potential targets for Iranian reprisal include American military installations in Qatar, Bahrain, and the Gulf of Oman.

Oil Prices and Market Shocks

The attack on June 12–13 marked a turning point. Israeli jets hit Iranian nuclear and military sites, prompting fears that this could be the start of a broader campaign. Brent crude initially surged by 12.5% before settling above per barrel, a sharp rebound after months of bearish trends. Analysts had expected prices to remain under pressure due to weakening global demand and OPEC+ increasing supply.

Now, these projections are being revised. Even if the tensions de-escalate in the coming days, markets may still price in a higher geopolitical risk premium. But if conflict drags on or the Strait of Hormuz is obstructed, oil could surge well past the 0 mark.

Rising Inflation and Political Sensitivities

Sustained oil price increases inevitably feed into inflation through costlier energy and transport. This could put political pressure on governments globally, especially in economies where energy prices weigh heavily in the cost of living. In the U.S., President Trump has placed energy policy at the center of his re-election campaign. He has promised to lower fuel prices by expanding domestic production and reengaging diplomatically in the Middle East - including potential efforts to revive nuclear negotiations with Iran as part of a larger plan to manage oil market dynamics.

Central Banks Caught in a Bind

Monetary policy could also be thrown off course. Most central banks, except Japan’s, are currently navigating through a cycle of easing in response to slowing global growth. However, if the oil shock persists, the risk of stagflation - simultaneous inflation and stagnation - could force a reversal. The U.S. Federal Reserve might have to delay planned rate cuts or consider tightening once again. Higher inflation expectations and shifting interest rate trajectories in the U.S. would likely push global bond yields upward. This comes at a time when U.S. fiscal policy is already increasing pressure on rates, with Congress recently passing a major spending bill projected to widen the federal deficit. The resulting rise in global borrowing costs would hurt both governments and the private sector.

Backdrop: What Triggered the Crisis

This crisis has been brewing since last October, but the latest strikes have taken things to a new level. Israel has conducted multiple operations targeting Iran’s nuclear program and military figures - including the Natanz facility and top commander Hossein Salami. The Israeli government has framed the strikes as necessary to prevent Iran from acquiring a nuclear weapon, especially in light of a recent IAEA report indicating that Tehran is enriching uranium to near weapons-grade levels.

Israeli Prime Minister Benjamin Netanyahu has stated that the military campaign will continue “as long as necessary,” while Iran has vowed a forceful response. The Iranian Foreign Ministry has warned that the U.S. will bear consequences for what it sees as complicity. Iran responded with missile and drone attacks of its own.

The U.S. administration has sought to distance itself from Israel’s actions. Secretary of State Marco Rubio labeled the Israeli operation a “unilateral” move, though President Trump later admitted that Washington had prior knowledge of the strikes. Meanwhile, international airspace closures and appeals for restraint from diplomatic missions underline the seriousness of the unfolding crisis.

Diplomatic Talks Overshadowed

Tensions have also overshadowed rare high-level talks between the U.S. and Iran. Just one day before the Israeli operation, American envoy Steve Witkoff held discussions with Iranian officials in Oman. The goal: to explore the possibility of a new nuclear deal. However, Israel’s strikes have now cast doubt on whether such diplomatic efforts can continue, adding another layer of uncertainty to an already precarious situation.

Trump, speaking to Fox News after the strikes, reiterated: “Iran cannot have a nuclear bomb, and we hope to return to the negotiating table.” But with both sides now entrenched and rhetoric hardening, the prospects for dialogue appear increasingly remote.

Source: Coface press release