Oil Prices on Track for Record Monthly Surge as Iran War Disrupts Global Markets
The Brent crude oil price is poised for its largest monthly increase on record in March, driven by severe market disruptions following the outbreak of war involving Iran. According to LSEG data, Brent crude has skyrocketed by 51% since the beginning of March, surpassing the previous monthly record of 46% set in September 1990 after Saddam Hussein's invasion of Kuwait triggered the first Gulf War.
Brent closed at $112.57 a barrel on Friday, a significant jump from $72.48 a barrel on February 27, just before the US-Israeli military action against Iran commenced. During March, Brent traded as high as $119.50 a barrel, reaching its highest level since June 2022. This surge occurred after Iran effectively closed the Strait of Hormuz, a critical chokepoint through which approximately one-fifth of global oil and gas typically flows.
Widespread Market Volatility and Supply Shocks
US crude prices also experienced substantial gains, with West Texas Intermediate rising 48% in March, on track for its strongest month since May 2020 during the Covid-19 pandemic. The price increases persisted despite a coordinated release of 400 million barrels of oil from emergency reserves announced on March 11. Analysts at BloombergNEF estimate that the Middle East conflict has removed 9 million barrels of oil per day from global supply.
Donald Trump's attempts to influence oil prices through verbal interventions appeared to lose effectiveness as the war progressed. Early in the month, his claims of diplomatic progress briefly pushed crude prices lower, but by late March, his declaration of a 10-day extension for Iran to reopen the Strait of Hormuz was followed by rising oil prices and falling stock markets, indicating heightened market skepticism.
Gold and Other Assets Under Pressure
Oil emerged as the top-performing asset during a highly volatile month for financial markets, where shares, government bond prices, and precious metals all declined. Gold, traditionally viewed as a safe haven against inflation, failed to uphold this reputation, with its spot price falling nearly 15% since the start of March. This decline positions gold for its worst month since 2008 and the fifth-largest monthly drop in the past 50 years.
Factors contributing to gold's slump include potential forced sales by investors covering losses or margin calls on other market positions. Additionally, the Turkish Central Bank sold approximately $3 billion worth of bullion last week, reducing its reserves by almost 50 tonnes to 772 tonnes to support efforts in stabilising the Turkish lira.
Global Stock and Bond Market Turmoil
Wall Street faced significant losses in March, with the Dow Jones Industrial Average entering a correction by the end of last week, falling more than 10% below its record high. Stock declines persisted despite Trump's latest extensions on planned strikes against Iran's energy infrastructure, as investors anticipated prolonged oil supply disruptions from the Gulf region.
Fawad Razaqzada, an analyst at City Index, noted, "Markets appear to be placing less weight on White House jawboning and focusing more on the underlying supply risks." Britain's stock market also suffered, with the FTSE 100 index dropping over 8%, on track for its worst month since March 2020 during the Covid-19 crisis. Nearly all gains from January and February were erased, leaving the FTSE 100 below 10,000 points.
UK government bonds weakened throughout March as traders revised forecasts, expecting the Bank of England to maintain or raise interest rates rather than cut them. As bond prices fell, the yield on 10-year UK bonds surged 17% to nearly 5%, marking the biggest monthly percentage rise in borrowing costs since September 2022 during Liz Truss's mini-budget bond sell-off. Other European government bonds were similarly affected, with Italian two-year debt heading for its worst month since May 2018.
Economic Implications and Outlook
Modupe Adegbembo, an economist at Jefferies, highlighted that European governments are operating from a weaker fiscal position compared to the 2022 energy price shock, limiting their capacity for large-scale fiscal interventions. "As a result, more of the adjustment is likely to fall on demand," she added, which could negatively impact the growth outlook. The ongoing market disruptions underscore the profound economic consequences of geopolitical tensions in the Middle East, with oil supply risks continuing to drive volatility across global financial assets.
