The best way to describe the month of February from the perspective of market performance is to resort to irritating clichés. Uncertainty prevailed, chiefly because of the mercurial US President. The number of ‘known unknowns’ remained elevated, the most salient of which were geopolitics and tariffs. The sum of the parts is far from equal to the whole, another way of saying that current oil price levels do not align with the forecast global supply, demand balance. Translating all of the above into the language of monthly returns, global equities edged higher. Curiously, and perhaps worryingly, major US stock indices, particularly the tech-heavy Nasdaq Composite Index, failed to share the enthusiasm of the rest of the world. Gold lost its mojo in the first half of the month but regained it later. As it is deemed a shelter of last resort when doubts about the economy emerge, its 8.5% monthly gain is ominous. Some faith in the dollar has been restored, but any hope this raises could prove misplaced. It remains comparatively weak.

The two major crude oil contracts managed to eke out gains over February, chiefly thanks to last Friday’s rally. Front-month WTI settled 2.8% higher and Brent 2.5% up. The rug was pulled out from under Heating Oil, which lost 2.4%, while RBOB rallied 8.1%. Events surrounding Iran and, to a lesser extent, Ukraine have been decisive factors in shaping prices and sentiment. The recent price action suggested that the oil fraternity was preparing for a military confrontation between the US and Iran, and those betting on it were not left disappointed.

By now, we have become accustomed to the unilateral actions the US President is willing to take, regardless of international or domestic law. Just recall the events in Venezuela or the explicit threat of annexing Greenland. The only difference between past adventures and the Iranian military intervention is that the latter is being carried out in cooperation with Israel. Yet it also lacks international (UN or even “Board of Peace”) or domestic (Congressional) authorisation. The strikes against the regime began on Saturday morning with the declared US goal of “ensuring that Iran does not obtain nuclear weapons,” which, we were assured last July, had already been obliterated.

In the ongoing operation, which appears to aim at the removal of the oppressive and autocratic regime, the Iranian Supreme Leader, Ayatollah Ali Khamenei, has reportedly been killed along with three other high-ranking officials, and the US military has confirmed three casualties. Of Iran’s 31 provinces, 24 have been hit, with targets including facilities of the Islamic Revolutionary Guard Corps, air defence capabilities, missile launch sites and military airfields. Israeli military jets bombed around 500 targets, according to the Israel Defense Forces.

Retaliatory measures were imminent. Iran has launched strikes on Israel and US military bases in the region, namely in Qatar, the UAE, Bahrain, Jordan and Kuwait. More worryingly for the oil market, the Strait of Hormuz, the narrow and crucial passageway between Iran and the UAE, which, in peaceful times, allows more than 20 mbpd of energy products to sail through, was effectively shut. Insurers are contemplating cancelling policies and raising premiums, while international oil companies and traders, speaking to Reuters, have suspended crude oil and fuel shipments via this critical artery. According to the Financial Times, two ships were hit in the proximity of the Strait, one belonging to the Iranian shadow fleet and the other carrying gasoline from Europe to Saudi Arabia, as ship-tracking firm Kpler reported.

Middle Eastern stock markets tumbled after reopening earlier on Sunday, and Asian equities duly followed suit later in the day. Oil prices opened $.../bbl higher and were $.../bbl up at the time of writing. Simultaneous attacks on oil-producing nations and the virtual standstill in the Strait present an unprecedented situation, the impact of which is simply impossible to assess over such a short period of time. The natural reaction is a willingness to pay a substantial risk premium to ensure supply from elsewhere.

Given that a regime of more than 40 years of hardline ideology, which willingly and brutally cracked down on domestic dissent, is being overthrown, it is no understatement to call the war against Iran the most consequential development in the region for decades, with an unpredictable outcome. In the immediate future, there is an enormous risk of instability. If the regime change is violent, internal unrest could spill over into Iraq or Lebanon. Should the Islamic Revolutionary Guard Corps consolidate power, tensions in the region will remain elevated. A comparatively peaceful transition, in which a reformist government emerges and normalises relations with Saudi Arabia, other Gulf states, and perhaps even Israel and the US, might stabilise the situation.

The short-term impact of the war on oil prices is there for everyone to see. When the potential supply of more than 20 mbpd of oil is at risk, Sunday’s OPEC+ decision to increase output by 206,000 bpd in a month amounts to little more than a drop in the Arabian Sea. Available spare capacity, estimated at around 3 mbpd, could mitigate the impact in the medium term, and so could an SPR release by the US and IEA member countries. There is no doubt that the immediate risk is skewed to the upside; a prolonged disruption, however, would lead to a significant increase in global inflation. In the event of normalisation, Iranian oil output and exports could rise significantly over the next 12–18 months, perhaps with US support, akin to Venezuela. Yet immediate concerns are not what might happen next year and beyond, but how long the military strikes against Iran will last, how severe the retaliatory measures will be, and how the world will cope with perceived and actual supply shortages.

It is impossible to provide prompt answers, but it is very much possible to end this note with a challenging question: if you went home late last Friday betting on an escalation in Iran, and if the market opens tonight significantly higher, as projected by several media outlets, would you keep your length, add to it, or liquidate?