Iran War Drives Commodity Cycle Reset—Energy Prices Near $150 Threshold as Growth Fears Rise

The market's reaction to the Iran conflict has been a surge in volatility across asset classes. The Deutsche Bank Currency Volatility Index (CVIX) hit an eight-month high last week, a direct measure of the uncertainty now gripping currency traders. This spike is not isolated. The yen slid to its weakest level since July 2024, and the euro fell to a multi-month low, pressured by the conflict's impact on energy markets and shifting growth expectations.

The link to commodities is immediate and powerful. Energy prices have surged, with oil tracking 25% higher and gas prices up 26% compared to pre-conflict assumptions. This isn't just a price move; it's a fundamental re-rating of risk. As the Strait of Hormuz effectively closed, the cost of moving goods and energy soared, directly weighing on importing economies. This dynamic is what's driving the FX swings, as countries reliant on oil face a sharper growth slowdown and higher inflation.

The volatility isn't confined to currencies. It has spread to other safe-haven assets. The VIX stock-volatility index climbed to levels last seen in April, while Treasury volatility, as measured by the ICE BofA MOVE Index, jumped to a nine-month high. This broad-based flight to safety underscores a market-wide reassessment of risk, where the Iran conflict has become the dominant uncertainty.

Viewed through a macro lens, this spike is a symptom of a broader commodity cycle disruption. Sustained high energy prices are feeding inflation, which in turn is pressuring central bank policy. Deutsche Bank now expects the Bank of England to hold rates steady, reversing an earlier call for a March cut, citing "serious upside risks to inflation" from the conflict. The bank estimates these energy shocks could lower UK GDP growth by 0.25 percentage points this year. This sets up a challenging trade-off: high inflation and growth headwinds may force central banks to keep policy restrictive for longer, which would support the dollar and real rates. Yet, the very volatility and economic damage from the conflict could eventually undermine that dollar strength. The longer the conflict persists, the more entrenched this volatile macro backdrop becomes, defining the longer-term price ranges for commodities and currencies alike.

Commodity Market Responses: Divergent Reactions to the Shock

The initial shock of the Iran conflict is rippling through commodity markets, but the impact is not uniform. Different sectors are reacting based on their unique exposure to supply risk, inflation, and growth. Energy prices are the most directly and severely impacted, while precious and industrial metals face a more complex, dual-pressure environment.

Energy is the epicenter of the volatility. With the Strait of Hormuz facing closure risks, the market is pricing in a major supply disruption. This has driven oil prices to levels that could trigger a significant inflationary shock. An economist at the Leibniz Institute for Economic Research has warned that if the conflict drags on, German inflation could temporarily spike to 6%. That scenario hinges on the conflict lasting more than four weeks and potentially leading to real shortages, which could push oil prices toward $150 per barrel. This isn't just a supply scare; it's a fundamental re-rating of the global energy cost structure, directly feeding the inflationary pressures that are already weighing on central bank policy.

Precious metals, particularly gold, are seeing a classic safe-haven surge. The broader market turmoil, with currency and bond volatility spiking to multi-month highs, is driving demand for stores of value. However, gold's long-term trend will be dictated by the same macro forces that are disrupting energy: real interest rates and the U.S. dollar. If the conflict fuels sustained inflation, it could eventually pressure central banks to keep policy restrictive, supporting real rates and the dollar. That would act as a headwind for gold, which does not pay interest. The metal's path will thus be a tug-of-war between short-term flight-to-safety flows and longer-term monetary policy dynamics.

Industrial metals face a dual pressure that could quickly shift the market from a supply-driven rally to a demand-driven sell-off. On one side, they are exposed to higher energy costs for production, which will squeeze margins. On the other, the conflict's primary risk is to global growth. The economist's warning of a German recession if the war persists is a stark example of how energy shocks can damage importing economies. If the conflict drags on, the risk of a broader slowdown in Europe and Asia would weigh heavily on demand for copper, aluminum, and other base metals. The market will be watching for signs that the growth damage is becoming entrenched, which would fundamentally alter the outlook for these commodities.

The bottom line is that the commodity cycle is being reset by this geopolitical shock. Energy is in a supply-driven inflationary phase, gold is caught in a volatility-driven safe-haven trade, and industrial metals are facing a potential pivot from supply to demand concerns. The duration of the conflict will be the key variable determining which of these narratives dominates over the coming months.

Macro Cycles at Risk: Real Rates, the Dollar, and Growth

The Iran conflict is now a central variable in the global macro cycle, with its duration directly shaping the trajectory of key commodity drivers. The scenario hinges on a stark contrast: a swift resolution versus a prolonged war. This divergence will dictate whether inflationary pressures force central banks to hold or hike rates, thereby capping commodity rallies, or whether economic damage from a growth slowdown becomes the dominant theme.

A prolonged conflict presents a severe inflationary shock, particularly for import-dependent economies. The economist at the Leibniz Institute for Economic Research has warned that if the war drags on for more than four weeks, inflation in Germany could temporarily rise to 6%. This would wipe out the economy's meager 0.2% growth from 2025 and push it into another year of recession. The mechanism is clear: sustained high energy prices, with the potential for oil prices reaching $150 per barrel if real shortages emerge, directly feed consumer costs. This scenario forces a policy shift. Deutsche Bank now expects the Bank of England to keep interest rates unchanged at 3.75%, reversing an earlier call for a March cut. The bank cites "serious upside risks to inflation" from the conflict, estimating the shock could lower UK GDP growth by 0.25 percentage points this year. In this high-inflation, growth-damage scenario, central banks are likely to maintain restrictive policy, supporting real interest rates and the U.S. dollar. For commodities, this creates a powerful headwind that could cap rallies, even as supply disruptions initially push prices higher.

The market is already pricing in this risk. The conflict has contributed to a more than 1,000-point drop in the Dow Jones since airstrikes began, reflecting a sharp decline in risk appetite. This is a direct signal that investors see the potential for a global growth slowdown. The bottom line is a trade-off: a long war fuels inflation and pressures central banks to hold rates, which supports the dollar and real rates, but simultaneously damages the economic growth that underpins demand for industrial commodities. The longer the conflict persists, the more likely this becomes a self-reinforcing cycle of inflation and stagnation.

Conversely, a swift resolution would allow energy prices to retreat and inflationary fears to subside. This would likely restore the earlier path for central bank easing, as seen in Deutsche Bank's revised forecast for two cuts this year, now expected in June and November. The market's recent bounce after comments suggesting a quick end to the conflict illustrates this sensitivity. For commodity cycles, a resolution would remove the immediate supply shock and inflation scare, allowing the focus to return to underlying growth trends and inventory cycles. The key takeaway is that the macro backdrop for commodities is now bifurcated by the conflict's timeline. The cycle's next phase-whether defined by supply-driven inflation or demand-driven weakness-depends entirely on how quickly geopolitical tensions ease.

Scenarios and Price Range Implications

The Iran conflict has reset the commodity cycle, but the direction of that reset depends entirely on the timeline of resolution. The market is now weighing two distinct scenarios, each with a clear and different implication for longer-term price ranges.

The first, and most favorable, scenario is a short war ending soon. If the conflict concludes by the end of the month, as one economist suggests, the inflationary shock would be contained. In this case, German inflation would climb to 3% in the summer, with a full-year average of 2.6%. This would allow central banks to maintain their easing cycles, as seen in Deutsche Bank's revised forecast for two cuts this year. For commodities, this scenario implies a return to a more normal macro backdrop. Volatility would likely retreat from its elevated levels, and the U.S. dollar could weaken as safe-haven demand fades. This environment would cap commodity rallies, as the primary supply-driven inflation scare dissipates and policy support returns.

The alternative, and more damaging, scenario is a prolonged conflict. If the war drags on for more than four weeks, the risks multiply. The economist warns that German inflation could temporarily spike to 6%, wiping out growth and pushing the economy into recession. The mechanism is straightforward: sustained high energy prices, with the potential for oil to reach $150 per barrel if real shortages emerge, directly fuel consumer costs. This would force central banks to hold or even hike rates, supporting real interest rates and the dollar. For commodities, this creates a powerful headwind that could cap rallies. Yet, the very high prices themselves would establish a new, higher floor for energy and related materials. The key trade-off is between a supply-driven inflationary phase and a demand-driven growth slowdown. The longer the conflict persists, the more likely the latter becomes, fundamentally altering the outlook for industrial metals.

The bottom line is that the conflict's resolution is the single most important catalyst for the commodity cycle. Until that resolution is clear, the market will remain priced for uncertainty. Elevated geopolitical risk premiums will keep volatility supported, defining the trading range for commodities. The key is to watch for signals on the conflict's duration. A swift end would allow the cycle to reset toward easing and lower inflation, capping price gains. A drawn-out war would cement a volatile, high-inflation environment, supporting higher commodity floors but at the cost of global growth.