[ANALYSIS] Iran Situation Report - Day 3

IRAN: The US-Israeli war with Iran has entered its third day, with all sides conducting large-scale airstrikes. The conflict is seemingly also spreading into Europe, amid reports that a UK RAF base in Cyprus was targeted by a suspected drone strike on Sunday night.

ENERGY: Oil rallied amid reports that three ships were targeted in the Strait of Hormuz, which handles around 20% of global oil and gas flows. Brent rose over 10% in early Asia, but pared gains to beneath USD 78/bbl in early Europe trading. Analysts noted that no broad and primary targeting of oil infrastructure has been seen thus far; that said, this morning, there were reports that Iranian drones struck an ARAMCO oil refinery in Tas Tannoura, forcing the refinery to shut. Iran has warned ships against transiting the Strait. ING said “it would be difficult to enforce a closure [of the Strait], and any attempts to do so would likely see a strong response from the US,” adding that “vessels are becoming increasingly reluctant to navigate the strait given the risks and the longer this reluctance persists, the more of an impact it will have on oil and gas markets.”

BALANCING ENERGY MARKETS: ING suggests that if markets perceive significant oil supply disruptions, the most immediate response from governments would likely be a coordinated release of crude from SPR. “There will be plenty of focus on the US SPR, which is about 35% smaller than what it was at the start of 2021, given it was used heavily following Russia’s invasion of Ukraine in 2022,” the bank writes, “however, at roughly 415mln barrels, there is room for further emergency releases to take some pressure off the market,” though adds that “clearly, releases from reserves can only offer temporary relief.” OPEC+ over the weekend agreed to raise output by 206k BPD in April (exp. 137k), as the conflict disrupted Gulf flows and shut the Strait of Hormuz. However, some analysts noted that limited spare capacity beyond Saudi Arabia and the UAE may curb market impact.

DIPLOMATIC CHANNELS: Weekend reports suggest that Iran’s Supreme National Security Council Secretary, Ali Larijani, is seeking to reopen nuclear talks with the US via Oman following joint US-Israel strikes, despite publicly vowing retaliation for Khamenei’s death. President Trump said Iran wants talks and that he has agreed, adding they “should have done it sooner” and “waited too long”. On Monday, Larijani publicly denied any negotiations, stating Iran will not negotiate with the US.

AIR TRAVEL: Iran has also struck regional airports; flights at Doha’s Hamad International airport have been halted, disrupting cargo flows. Airline equities in APAC trade saw sharp downside.

US CASUALTIES: Reports over the weekend said three US service members have been killed and five seriously wounded. A Reuters/Ipsos poll conducted ahead of these reports showed 27% approval for the strikes, with 56% viewing Trump as too willing to use military force. Recent reports suggested a US F-15 fighter jet has been shot down in Kuwait.

OUTLOOK: Traders will focus on the duration of the conflict, whether energy infrastructure is targeted, and the progress of diplomatic engagements. Trump suggested US combat operations could last weeks. Analysts at HSBC said the USD is likely to hold an upper hand near term, contrasting with June 2025 during the war with Iran, when initial strength was short-lived due to US policy uncertainty. Its analysts wrote that this did not signal a loss of safe-haven status, noting geopolitical events can send mixed currency signals depending on surrounding conditions. However, the bank added that “we can have no conviction on how the situation in Iran may evolve,” writing that “the impact is contingent on the duration of any conflict and how it extends to the broader region.”

The ongoing conflict involving the US, Israel, and Iran, now in its third day, poses increasing risks to energy markets, especially with reports of targeted strikes around critical waterways like the Strait of Hormuz. Oil prices have seen significant volatility, and while OPEC+ has attempted to adjust supply, the situation's unfolding dynamics could heavily influence both commodity prices and regional stability, suggesting a heightened focus for traders on energy-related assets and safe-haven currencies like the USD.