Markets · Research note
The Ripple Effect: Economic Ramifications of the US-Iran Conflict on Middle Eastern Markets
The 2026 war was not primarily a price shock. It was a routing shock, and the Gulf states that owned a pipeline out of the strait had a different war from the ones that did not.
Most accounts of the 2026 Iran war begin with the oil price, which is the wrong place to start. Brent went from roughly $72 a barrel on 27 February to about $120 at its March peak, which is a large move but not a historically unusual one. The more useful question is why two Gulf states finished the first quarter richer and four finished it substantially poorer, when all six sell the same commodity into the same market. The answer is not price: it is geography, and specifically whether a country owned a pipe that reached open water without passing through the Strait of Hormuz.
This piece argues that the 2026 shock is best understood as a routing shock rather than a price shock. A price shock raises revenue for every producer; a routing shock raises the price while denying some producers the ability to sell at it, and the distinction determines who gained, who lost, and where the durable consequences landed.
What actually happened, in order
The United States and Israel struck Iran on 28 February 2026. Iranian forces responded by attacking and obstructing commercial shipping in the Strait of Hormuz. Transits collapsed from an average of 138 vessels a day before the war to no more than five, and because roughly a quarter of seaborne crude and a fifth of traded liquefied natural gas normally move through that corridor, the effect on physical supply was immediate.
Brent rose above $120 in March, a four year high, with dated cargoes assessed higher still. A two week ceasefire followed on 7 April, the United States announced the strait would reopen to commercial shipping the next day, and prices fell back sharply. On 17 June, Donald Trump and Masoud Pezeshkian signed a memorandum of understanding removing the US naval blockade and providing safe passage for commercial vessels, free of charge, for sixty days. Brent traded near $73 shortly afterwards, roughly where it stood the day before the war began.
The agreement did not hold. Attacks on shipping resumed in July and the United States reimposed the blockade on 12 July, with Brent gaining more than 9% in a single session.
Figure 1 makes the central point about volatility. The price recovered its pre-war level twice and lost it twice. Any Gulf budget built on an assumption about the average price of oil in 2026 was therefore wrong in both directions within five months.
The Hormuz Paradox
The defining feature of this crisis is that the countries causing the price spike could not sell into it: at the peak of the disruption an estimated 13 million barrels per day of Gulf exports were stranded behind the blockade. A producer earns nothing from a high price on a cargo that cannot leave port.
Two states escaped this trap. Saudi Arabia ran its East-West Pipeline, known as Petroline, at close to its full 7 million barrels per day capacity from the Eastern Province to Yanbu on the Red Sea. The United Arab Emirates moved up to 1.8 million barrels per day through the Abu Dhabi Crude Oil Pipeline to Fujairah, which sits on the Gulf of Oman outside the strait. No other Gulf producer had a comparable option.
Figure 2 shows how narrow that advantage was. Total bypass capacity across the region is roughly 3.5 to 5.5 million barrels per day; normal traffic through the strait is around 20 million. Hence the pipelines were never a regional solution; they were a national advantage held by two countries.
Furthermore, the damage was not confined to crude. QatarEnergy halted LNG production on 2 March and declared force majeure on 4 March, taking roughly 80 million tonnes per annum, close to a fifth of global LNG supply, out of the market at once. Iranian missile strikes on Ras Laffan Industrial City on 18 March then converted a temporary halt into permanent destruction.
| Asset | Status after March 2026 | Capacity effect | Recovery |
|---|---|---|---|
| LNG Trains 4 and 6 | Written off | 12.8 MTPA removed, about 17% of Qatari capacity | Three to five years |
| Ras Laffan South site | Partially operating | Capacity down from 36 to 24 MTPA | Not recovered this decade |
| Pearl GTL train | Offline | Gas-to-liquids output suspended | At least one year |
| Qatari LNG exports overall | Force majeure from 4 March | ~80 MTPA halted at peak, roughly 19% of global supply | Phased restart from mid-2026 |
QatarEnergy estimated the damage at roughly $20 billion in lost annual revenue. Sources: QatarEnergy, Wood Mackenzie, Industrial Info Resources.
This matters for inflation forecasting in a way that a crude price spike does not. Oil flows resume when a blockade lifts; a written-off liquefaction train does not resume, because it must be rebuilt. Therefore part of the 2026 energy shock is permanent supply destruction rather than temporary disruption, and it will still be present in gas prices long after the shipping lanes clear.
The markets sorted themselves by geography
Regional equity markets did not move together; they separated along the same line as the pipelines.
Figure 3 sets out the spread. Saudi Arabia’s Tadawul rose roughly 2% after the outbreak, helped by distance from the fighting and by revenue that kept arriving through Yanbu. The Abu Dhabi exchange fell 7.13% in March, cushioned by its weighting toward energy and banking. The Dubai Financial Market entered bear territory, falling more than 20% from its February peak, because its index leans on property, tourism and aviation, which are precisely the sectors that lose when a region becomes dangerous to visit. Combined UAE market capitalisation fell by approximately $120 billion.
Credit markets repriced with more discipline than the equity market did.
| Index | Pre-war | Peak crisis | Move |
|---|---|---|---|
| S&P MENA Sukuk Index, yield to maturity | 4.46% | 5.15% | +69 bps |
| S&P MENA Bond Index, yield to maturity | — | 5.37% | Five year high |
| S&P GCC High Yield Sukuk Index | 5.82% | 7.76% | +194 bps |
| Reference: same index, COVID-19 shock, 2020 | — | — | +518 bps |
Sources: S&P Dow Jones Indices, March 2026.
The final row is the one that carries the argument. Spreads widened to five year highs, and they still widened by well under half the amount seen in 2020. Investors demanded more compensation for holding Gulf risk; they did not conclude that Gulf sovereigns might fail to pay, which is a meaningful distinction and one that is visible only when the move is placed against a genuine solvency panic.
The fiscal bill arrives regardless
Currency pegs held throughout, as they almost always do; the pegs are not where the strain shows. It shows in the budget.
Saudi Arabia recorded a first quarter deficit of 125.7 billion riyals, about $33.5 billion, the largest quarterly shortfall on record. Spending rose 20% to 386.7 billion riyals against revenue of 261.0 billion. Oil revenue fell only 3% year on year to 144.7 billion riyals, which is the detail that matters: the deficit was driven mainly by what the state had to spend, not by what it failed to earn. Defence outlays rose 26% year on year and subsidies rose sharply to hold down domestic prices.
Note what this means for a country that avoided the blockade entirely: Saudi Arabia sold its oil, sold it at elevated prices, and still posted a record deficit. Conversely, Kuwait projected a deficit of 9.8 billion dinars, roughly $32.1 billion, with output down by more than a third and no bypass infrastructure at all. The IMF cut its 2026 growth projections to a 14.7% contraction for Qatar and 4.2% for Kuwait.
Hence the second-order effect, which is the one that reaches Western portfolios. Gulf sovereign wealth funds have historically supplied marginal capital to global markets. In April the Public Investment Fund adopted a 2026 to 2030 strategy directing about 80% of its $925 billion portfolio to domestic investment, cutting the international share from a peak of 30% to 20%. Funding for LIV Golf ended, NEOM tunnelling contracts were cancelled, and the 2029 Asian Winter Games at Trojena were postponed. The Central Bank of the UAE deployed a one trillion dirham resilience package, letting banks draw on up to 30% of cash reserve requirements and deferring IFRS 9 loan staging for war-affected borrowers.
Where this reading is weak
The routing argument explains the cross-section well and the time series badly. It tells you why Saudi Arabia outperformed Qatar; it does not tell you when the risk premium decays, because that depends on military and diplomatic events that no market framework prices reliably. The June memorandum is the clearest evidence of this: it removed the blockade and roughly $28 a barrel of premium within weeks, and it survived under a month.
Furthermore, the fiscal figures above are first quarter numbers reported in early May, which is a narrow window. Deficits driven by one-off defence and subsidy spending are not the same as structural deficits, and only the full year will separate them. The sukuk comparison is similarly limited, since a spread that stayed below 2020 levels through June says nothing about where it goes if the blockade becomes permanent.
Conclusion
The 2026 conflict repriced Middle Eastern markets along a line drawn by infrastructure rather than by fundamentals. States with a pipeline to open water captured the price gain; states without one held stranded cargo while paying wartime costs, and even the winners ran record deficits, which suggests the binding constraint in this crisis was fiscal rather than commercial.
The durable consequence is not the oil price, which has already round-tripped twice. It is the combination of destroyed LNG capacity that will not return this decade, a fractured OPEC after the UAE’s departure, and roughly $10 billion a year of Saudi sovereign capital redirected from international markets to domestic ones. Those three things will still be true when Brent is unremarkable again.
Update: 10 August 2026
This piece was written on 15 June, two days before the memorandum of understanding was signed. Three developments since then bear on the argument above.
The ceasefire framework failed: Iranian attacks on commercial shipping resumed in July, and the United States reimposed the naval blockade on 12 July while adding a 20% charge on cargo. Brent rose more than 9% that day, its largest single-session gain since 2020, and has since traded in a wide band roughly between $82 and $114. On 6 August Iran published a draft plan that would route vessels through its territorial waters rather than the established lanes, which pushed prices up again.
Central bank policy has diverged from the June expectation. The Federal Reserve held its target range at 3.50 to 3.75% on 29 July over a divided committee, with Chair Kevin Warsh declining to move on rates while signalling readiness to act on inflation.
The core claim holds and is stronger than it was in June. Two full round trips in the oil price within six months, with the second reversal driven by a diplomatic failure rather than a supply event, is direct evidence that the price is the noisy variable. The infrastructure position is not. Saudi Arabia’s Petroline capacity, Qatar’s destroyed liquefaction trains and the PIF’s reallocation are all unchanged by anything that happened between June and August.