Operation epic fury – analysed

Last week, we mapped out the scenarios should the United States (US) decide to embark on a military intervention in Iran. On 28 February 2026, our worst-case scenario became the baseline. The United States and Israel launched Operation Epic Fury – a coordinated strike targeting Iranian leadership, nuclear infrastructure, and military capacity. With Supreme leader, Ayatollah Ali Khamenei being killed alongside members of his family, the risk of significant disruption to the Strait of Hormuz has increased substantially, and commercial shipping activity has declined as insurers and shipping companies reassess risk. Every central bank, finance minister and portfolio manager is now working through the same question: how long will this conflict last, and what will it cost? This week we look at why the US and Israel moved when they did, what the oil market is signalling, and what the economic implications are – for the region and for the world.

Why now?

The strikes were preceded by what looked like a diplomatic breakthrough. On 27 February, Oman’s foreign minister declared that Iran had agreed to never stockpile enriched uranium and had consented to full International Atomic Energy Agency verification. Iran’s foreign minister called it a “historic” agreement. Within 24 hours, however, bombs were falling on Tehran. Understanding that divergence is the starting point for getting to grips with what happened.

For Israel, several conditions aligned. Intelligence assessments indicated Iran’s enrichment programme had advanced to a point where a breakout to weapons-grade material could occur within months – the June 2025 strikes degraded, but did not eliminate, that capacity. Anti-government protests that erupted across Iran from late December 2025, driven by economic collapse and a freefall in the Iranian rial, had created a degree of internal instability not seen since 1979. In addition, Hezbollah being degraded through earlier operations and Hamas being functionally dismantled, meant Iran’s proxy network – its primary tool for immediate retaliation – was at its lowest operational effectiveness in a decade. With Khamenei ageing and succession unresolved, Israeli planners concluded that a decapitation strike could paralyse command-and-control long enough to prevent a coordinated response. From Israel’s perspective, the conditions for action were good, but the window was closing.

The US position was more direct. US President, Donald Trump, had long positioned any Iranian nuclear capability as unacceptable. Talks mediated by Oman had produced a preliminary agreement, but the US demanded zero enrichment – a position Iran could not agree to politically. Without that concession, the military option followed. US Treasury Secretary, Scott Bessent, had already acknowledged that Washington deliberately engineered a dollar shortage in Iran to deepen its economic crisis and encourage domestic unrest. At 2:30 am Eastern Standard Time, on 28 February, President Trump released an 8-minute video stating that the purpose of the strikes was regime change – an explicit declaration that left no room for ambiguity. This week, the US Senate failed to pass a war powers resolution to limit President Trump’s authority, giving the operation the green light to continue. The conflict is entering its seventh day, today, and there is no ceasefire in sight.

Oil

The key distinction from previous Iran-related flare-ups is that markets are pricing a materially higher probability of sustained supply disruption, not merely adding a normal geopolitical risk premium. Shipping through the Strait of Hormuz – through which approximately 20% of global crude and 20% of Liquid Natural Gas (LNG) transit daily – has fallen sharply as insurers and vessel operators reassess the risk of transiting the area. Even without a formal closure, targeted attacks on vessels have been sufficient to deter commercial traffic.

Brent opened the week at $78.41/barrel, up 7.6% on Monday, and has traded in the $79/barrel to $83/barrel range since. West Texas Intermediate has moved in tandem, up more than 7% on the week. European natural gas (Dutch TTF) nearly doubled in 48 hours – from €30/megawatt hour (mwh) to above €60/mwh – before pulling back to around €48/mwh when reports of backchannel Iranian contact (unofficial/secret communication) with the US emerged. Goldman Sachs revised its second quarter Brent base case to $76/barrel, assuming short term disruption-risk followed by gradual normalisation. If sustained disruptions persist for several weeks, their model puts Brent at $100/barrel. Other analysts have flagged $120/barrel if key Middle Eastern infrastructure is directly impacted.

Despite sharp moves, markets have not traded in a disorderly fashion. Oil inventories were in reasonable shape entering the crisis – China, in particular, holds large strategic reserves. The expanded Organisation of the Petroleum Exporting Countries, OPEC+, retains approximately 3.5 million barrels per day (bpd) of spare capacity and has pledged to increase output by 206,000 bpd if necessary. Market belief that the US navy will act to keep Hormuz navigable has also helped limit panic. However, a portion of OPEC’s spare capacity cannot reach global markets if shipping constraints persist and alternative pipelines cannot fully offset the Hormuz risk.

Global economic implications

The primary transmission from this conflict into the broader economy runs through inflation expectations. Every $15/barrel increase in Brent adds approximately 0.8% to the global headline Consumer Price Index. Central banks have entered this period with limited room for error. Currently, services inflation is sticky, rate-cut cycles are tentative, and expectations for rate cuts finely balanced. An energy-driven spike complicates this.

Asia remains structurally the most exposed region. The US absorbs oil shocks differently due to its export capacity, while Asia relies heavily on imported energy. China sources about 40% of its oil and 30% of its LNG through Hormuz. India imports over 60% of its crude and more than half its LNG from the Gulf. Japan and South Korea are almost entirely import-dependent. Given the uncertainty, South Korea’s Kospi stock indices saw a sharp drawdown, triggering a circuit breaker (regulatory mechanism that temporarily halts trading during times of extreme volatility), illustrating how quickly sentiment can deteriorate in an energy-shock environment.

The Gulf states face their own pressures. Bahrain, Saudi Arabia, Qatar, the United Arab Emirates, Kuwait and Oman have all absorbed drone or missile strikes. Debris struck facilities such as Saudi Arabia’s Ras Tanura refinery, highlighting the vulnerability of infrastructure even in high security environments. Disruptions to Iraqi and Kurdish fields, as Iranian attacks forced the shutdown of their oil fields, add further uncertainty.

Europe entered this period with lower than ideal natural gas buffers; hence TTF reacted more sharply than crude. The eurozone faces higher energy costs at a time when the region’s growth is already fragile.

In financial markets, safe haven trade has been orderly. The dollar has strengthened modestly and held onto its gains. US equities have been volatile but resilient, with energy and defence offsetting weakness elsewhere. US Treasuries sold off on rising inflation expectations. Gold spiked before moderating as Treasury yields and the dollar rose, and as some investors liquidated their positions to raise cash. Airlines remain the clearest casualties due to fuel, insurance and routing costs.

Given the full-scale nature of the conflict, there are three scenarios that may play out:

1. The base case (60%) remains short term disruption risk. Tensions ease, and shipping confidence gradually returns, seeing Brent settle in the $70/barrel to $80/barrel range. Gold holds above $5,000/ounce and global rate cutting cycles resume with modest delays.
2. The adverse case (30%) is a multi week period of elevated disruption risk. Brent moves toward $100/barrel, TTF spikes above €60/mwh, global inflation picks up, and central banks adopt a hawkish hold. Emerging Market currencies remain under pressure, and Asian economies deploy fiscal support. Global growth is revised down by 0.5% to 1%.
3. The tail risk (10%) is infrastructure escalation, where critical facilities such as Saudi Arabia’s Ras Tanura refinery and Jafurah gas plant, and Qatar’s Ras Laffan refinery suffer lasting damage. Brent moves above $120/barrel, LNG supply is severely curtailed, and global recession risks increase. This remains a low probability but important risk.

Market moves

Bonds

The US 10-year Treasury yield held around 4.14%, supported by renewed inflation concerns as Middle East hostilities have driven oil prices higher. Markets have pushed back Fed rate-cut expectations to September or October, retreating from earlier July projections, with resilient US jobs data, stronger productivity, and faster services-sector growth all reinforcing the case for patience.

United Kingdom (UK) 10-year gilt yields climbed to approximately 4.4%, their highest level since mid-February, as surging energy costs reignited inflation anxiety. The Bank of England (B0E) easing outlook has narrowed sharply, with markets pricing in around a 20% chance of a cut this month and a single 25-basis-point reduction for the full year. The Office for Budget Responsibility (OBR) trimmed its 2026 UK growth forecast to 1.1% from 1.4%, though projections for 2027 and 2028 were revised up to 1.6%.

Germany’s 10-year bund yield reached 2.8%, its highest level since mid-February, as energy-driven inflationary pressures reshaped European Central Bank (ECB) expectations. February eurozone headline inflation printed at 1.9% with core inflation at 2.4%, both surprising to the upside. Markets have flipped from pricing a 40% probability of a rate cut last week to a similar probability of a hike, with a 60% chance of tightening priced by June 2027.

Indices

US stock futures steadied following Thursday’s bruising session on Wall Street, where the Dow shed 1.61% and the S&P 500 and Nasdaq fell 0.56% and 0.26% respectively, as uncertainty around the war in Iran and surging oil prices weighed on sentiment. Eight out of 11 S&P sectors closed in the red, with industrials and materials among the hardest hit. Manufacturer of construction and mining equipment, Caterpillar and jet engine manufacturer, GE Aerospace, each dropped over 3% on supply chain and margin concerns. Oil surged more than 8% on Thursday – its strongest weekly performance since 2022 – though it pulled back after the Trump administration signalled it was exploring options to address the price spike. Attention now turns to today’s February Non-Farm Payrolls report for fresh US labour market guidance.

The UK’s FTSE 100 fell over 1% to a three-week low on Thursday, reversing Wednesday’s partial recovery. Mining stocks bore the brunt of the selling, with Fresnillo and Endeavour Mining each dropping 7.3% to 5.8% as gold and silver weakened on higher-for-longer rate expectations, and Rio Tinto, Antofagasta and Anglo American all declining sharply. Airlines were also caught in the crossfire, with EasyJet off 5.0% and International Airlines Group losing 3.6% amid more than 23,000 global flight cancellations. Consumer goods company, Reckitt, fell over 5.8% despite solid quarterly results. Pest control company, Rentokil, bucked the trend, surging more than 10% on stronger annual profits.

Frankfurt’s DAX closed around 1.6% lower at 23,816, pressured by ongoing Middle East uncertainty and rising energy prices. Science and technology company, Merck remained under strain following disappointing earnings and a cautious outlook for 2026. Defence contractor, Rheinmetall, energy company, Siemens Energy, and semiconductor manufacturer, Infineon, shed between 3.7% and 5.9%, while banks, Deutsche Bank and Commerzbank each fell over 2%.

Commodities

Brent crude dipped about 1% to around $84/barrel, easing back after the Trump administration hinted at actions to tame the rally, like tapping strategic reserves, loosening fuel-blending standards, and Treasury engagement in oil futures. Prices nonetheless jumped nearly 20% for the week – the sharpest weekly rise since 2022 – due to Middle East unrest halting Strait of Hormuz shipments. President Trump floated ideas on shaping Iran’s next leadership, but Iran’s foreign minister dismissed any ceasefire bids or talks.

Gold prices steadied near $5,130/ounce, yet the metal was poised for its first weekly decline in five weeks, weighed down by a stronger dollar and rising Treasury yields that curbed its safe-haven appeal. The Middle East conflict has buoyed demand for protective assets, but the resulting spike in the oil price has stoked inflation fears, prompting traders to dial back US Federal Reserve (Fed) rate-cut forecasts to a single move this year. Solid US data – such as falling jobless claims, better productivity, and brisker services expansion – bolstered arguments for Fed restraint, as the conflict intensified on Thursday with Iran’s missile and drone assaults across the Gulf, targeting a Bahraini oil refinery, alongside US embassy closures in Kuwait.

European natural gas futures fluctuated around €50/mwh on Thursday following Putin’s threats to slash supplies to Europe, amid the Middle East crisis. Russian deliveries have already tumbled sharply and under European Union (EU) curbs, only account for around 13% of Europe’s needs. However, Putin’s warning exacerbates the EU’s gas pressures due to Qatar’s key LNG plant shutdown, the Hormuz blockade, and EU storage falling below 30%.

Currencies

The US Dollar Index has steadied at around 99, heading for a weekly rise of over 1%, fuelled by safe-haven demand amid the deepening Iran conflict and soaring oil prices. As the US-Israeli campaign marks its seventh day with Tehran firing fresh missiles and drones over the Gulf, investor risk appetite remains subdued. President Trump further stirred controversy by claiming influence over Iran’s leadership succession. Oil-fuelled inflation concerns have delayed Fed rate-cut expectations, which have been pushed out from July to September or October, boosting the dollar, mostly against the euro due to Europe’s heavy reliance on Middle Eastern energy.

The euro is lingering near $1.16/€ – its lowest level since mid-January – as the conflict ramps up, with a US submarine reportedly sinking an Iranian vessel and NATO downing a missile bound for Turkey, heightening eurozone inflation pressures. February figures revealed EU headline inflation at 1.9% and core inflation at 2.4%, topping estimates. Traders have slashed odds of a cut by the ECB, now seeing about a 40% chance of a hike by year-end and 60% by mid-2027.

Sterling has slipped to around $1.335/£ – its softest level since early December – as markets see only a 20% chance of a BoE cut this month and only one reduction of 25 basis points all year. The OBR cut its 2026 UK growth outlook to 1.1% from 1.4%, though it raised 2027 and 2028 estimates to 1.6%.

*Please note that all information is at the time of writing.

Key indicators:

GBP/USD: 1.3349
GBP/EUR: 1.1490
GBP/ZAR: 22.16

BRENT CRUDE: $85.70
GOLD: $5,116

Sources: Bloomberg, Investing.com, Reuters, Trading Economics and TradingView.

Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.

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