A Longer Middle East War Could Trigger an Oil Shock

A growing conflict between the United States, Israel, and Iran could last longer than many investors expect. If it does, the economic impact may spread well beyond the Middle East.

Portfolio strategist James Kostohryz recently warned that markets may be too calm about the risk. Brent crude, which spent the early week anchored near $70, is now testing the $85 level. According to Kostohryz, this is just the first step; if the conflict drags beyond a month, the $100 threshold becomes a base case, not a tail risk.

Military conflicts tied to energy supply rarely resolve quickly. Strategic goals such as weakening missile systems or nuclear programs take time to achieve.

Kostohryz argues that even a short extension in the timeline could change the economic outlook.

The tightening is already visible. With Iraq forced to shut in over 1.5 million barrels of daily production due to storage hitting capacity and the Strait of Hormuz seeing near-zero tanker traffic today, the 'slow-burn' conflict has turned into a direct threat to global flows. Shipping routes, infrastructure, and regional supply chains face pressure. In energy markets, where even minor supply-side hiccups are amplified by high-speed trading, these signals are being watched with extreme caution.

While the market is no longer 'calm,' the prevailing hope is still that this disruption is a temporary spike. Kostohryz warns that if this hope proves fragile, the next leg up for oil will be even more violent.

Brent’s surge past $85 represents more than just a bad day on the terminal — it’s a structural shift in risk pricing. This level historically acts as the ceiling for 'manageable' volatility; breaching it signals that the market no longer expects a quick return to normal supply.

According to Kostohryz, a conflict lasting more than four to six weeks could push oil prices above $100. If disruptions extend two or three months, prices could climb much higher.

When prices rise sharply, the effects permeate every layer of the economy. Fuel costs rise, shipping costs increase, and businesses often pass those increases on to consumers.

Inflation tends to follow.

If oil prices surged toward $200 per barrel, the result could be a major economic slowdown. Equity markets would react quickly to that kind of shock.

Modern economies remain heavily tied to energy flows. When oil spikes, economic growth often weakens soon after.

If energy prices spike sharply, the pressure does not stay in the oil market.

Higher fuel costs push up transportation prices. Airlines pay more for jet fuel. Shipping companies face higher diesel costs. Manufacturers see their input expenses climb. Over time, those increases filter into everyday goods.

That is how energy shocks turn into inflation shocks.

While $200 oil remains a worst-case scenario, Kostohryz notes that even the current move toward $100 could act as a 'tax' on a global economy already dealing with rising private credit defaults. If these levels hold, the transition from an energy shock to a full-blown recession becomes a matter of when, not if.

The timing is particularly poor for the private credit sector. With defaults already trending upward and redemption requests mounting, a sustained energy-driven recession would hit the sector at its most vulnerable point in years.

The combination of higher energy costs and tightening credit has historically been difficult for markets to absorb.

Kostohryz believes markets are not fully pricing in the risks of a prolonged conflict.

Because of that, he favors exposure to Brent crude, which he says is more directly tied to global supply disruptions. Some investors gain exposure to that through instruments such as the BNO ETF.

At the same time, he is cautious on U.S. and Canadian oil equities. In a prolonged conflict scenario, governments could impose export restrictions or other controls that limit the extent to which domestic producers benefit from higher prices.

He also argues that gold may already reflect too much crisis pricing. Despite the geopolitical tension, he views the metal as vulnerable after its recent run.

For those seeking an inflation hedge, Kostohryz favors Treasury Inflation-Protected Securities (TIPS) over gold, arguing that bullion already carries a significant 'crisis premium' that leaves it exposed to a pullback.

While the initial shock has finally hit the tape, many investors are still betting that this spike is a 'flash in the pan' that will resolve quickly. Despite the S&P 500's 1.1% slide yesterday, some bulls remain hopeful that a diplomatic off-ramp is just days away.

Kostohryz believes that assumption may be misplaced.

Military goals such as weakening nuclear programs or missile production are complex and rarely unfold on predictable timelines. Even limited disruptions to oil supply can quickly change energy markets.

The core risk has now shifted from pure complacency to a failure to grasp the duration of the disruption. If the Strait of Hormuz remains impassable for more than a few days, the gap between 'temporary volatility' and 'structural economic damage' will close rapidly.

When investors assume stability, even a modest shift in conditions can trigger a rapid repricing of risk. Energy markets tend to move first. Equity markets often follow.

The global economy is no longer operating under the safety net of cheap, stable energy. If the window for a quick resolution closes this month, yesterday's 800-point slide will likely be remembered not as a buying opportunity, but as the opening act of a painful, multi-month structural shift in the global economy.