Khamenei’s death, which was confirmed by Iranian state media earlier today, triggered warnings about sharp retaliation from Tehran. US President Donald Trump announced that the 86-year-old leader had been killed on the first day of what he described as massive joint airstrikes.

Notably, more than 20% of the world’s oil passes through the Strait of Hormuz, which connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. The heavy missile strikes around the area have raised worries about supply constraints, leading to a spike in oil prices.

US WTI surged 3.19% to $67.29 per barrel, while Brent reached $72.87 on Friday. This came ahead of the significant rise in the Middle East’s war during the weekend, with rising worries around further escalations.

Barclays sees oil prices crossing $100:

UK’s second largest bank Barclays on Saturday increased its forecast for Brent Crude oil futures to $100 per barrel. “Oil markets might have to ‌face their ⁠worst ⁠fears on Monday. As things stand right now, we think Brent could hit $100 (per barrel), as the market grapples with the threat of a potential supply disruption amid a spiraling security situation in the Middle East,” the bank said in its report.The hike in forecast came after US and Israel’s initial strikes on Iran and the latter’s retaliation. Notably, the war has escalated significantly since then, with the death of Iran’s supreme leader Ayatollah Ali Khamenei sending shockwaves across the globe.

Iran is located along the Strait of Hormuz, through which approximately a fifth of the world’s oil supply passes, Ali Vaez, who heads the Iran Project at the International Crisis Group, said in a post on X. “Even limited disruption could spike energy prices, fuel inflation, and rattle global markets,” he added.

Oil overeacts first, then adjusts’

Equirus Securities in its latest note highlighted that oil prices have repeatedly surged 25-300% during geopolitical crises, even when physical supply losses were temporary. “Pattern is consistent: Oil overreacts first, embeds a geopolitical risk premium, and then gradually adjusts as trade flows reroute & fundamentals reassert themselves. Real forecasting challenge is not predicting the initial spike but estimating how long disruption and embedded premium will persist,” it said.The pattern is consistent – oil overreacts first, embeds a geopolitical risk premium, and then gradually adjusts as trade flows reroute and fundamentals shine through, the brokerage said, adding that the real challenge is not predicting the initial spike but how long the disruption and the resulting premium will persist.

“At the start of the Russia–Ukraine war, markets assumed a prolonged conflict would keep crude structurally above $100/bbl & push OMCs to distressed valuations. Had one known the war would still be ongoing 4 years later, triple-digit oil would have seemed inevitable. Instead, what happened in reality, after briefly spiking above $120/bbl, prices retraced as flows adjusted, Russian barrels were rerouted, & fundamentals reasserted themselves. Today, crude trades closer to fundamentals & OMCs are roughly triple their crisis-implied lows,” Equirus Securities further said.

If escalation threatens the key Strait of Hormuz, premium becomes structural rather than proportional, the brokerage said. “Even partial disruption risk could embed a $20–$40/bbl geopolitical premium, reopening a pathway toward $95–$110+, well beyond mechanical impact of Iran’s barrels alone,” it added.

For India, which relies heavily on imported crude oil, the immediate consequence has been rising inflationary pressure triggered by higher energy prices, said Manoranjan Sharma, Chief Economist at Infomerics Ratings. “Elevated import costs are likely to widen the current account deficit and further strain the fiscal deficit through increased subsidy obligations,” he added.

Rising Middle East tensions raise risks of shipping disruptions, higher global freight and insurance costs, even without a full blockade, said Madhavi Arora, Chief Economist at Emkay Global Institutional Equities. “As per our preliminary checks, India’s crude and LNG supplies are largely intact, and India has buffers in the form of diversified imports, strategic reserves and operational stocks, helping absorb short-term shocks,” the analyst added.

“In the event of tensions in the Middle East continuing, higher oil prices will directly feed into the input costs and macro indicators. If however the situation normalizes with OPEC+ also indicating a sharp output increase (0.4mb/d), and oil doesn’t spike and fall below $70/bbl, the macro impact could be contained,” Arora further said.

Back on Dalal Street…

The shares of oil marketing companies (OMC) will remain in focus tomorrow, amid the expected rise in crude oil prices. The shares of oil refineries will likely see an uptick, mirroring the rise in oil prices.

Tyre and paint stocks will also be a key monitorable tomorrow, as crude oil is a key raw material source for both paint and tyre companies because many of their inputs are petroleum-based derivatives.
Also read: https://economictimes.indiatimes.com/markets/stocks/news/will-sensex-nifty-react-amid-escalating-middle-east-war-after-khameneis-killing/articleshow/128909536.cms

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)