Oil Prices and Iran

The extent to which oil prices rise will drive everything else in markets this week

I spent the weekend previewing market fallout from the conflict with Iran. There’s two key points. First, the extent to which oil prices rise will drive all other markets. For example, in currency space, oil exporting countries will benefit and oil importers will suffer. But the scale of this differentiation depends on the underlying move in oil prices. The more they rise, the bigger are knock-on effects in currency space. Second, geopolitical risk has been one of the key drivers behind the “debasement trade,” which is why gold prices jumped after the reciprocal tariff rollout in April 2025 and during the fisticuffs over Greenland in January.

When markets started trading last night, the Brent oil price was up to $76.3 from $72.5 at Friday’s close. That’s a five percent rise and pretty modest. One reason I hear is that Brent had already been moving up in recent weeks as markets braced for war. Another could be that Iran’s military response to US attacks has looked weak, causing markets to cut back on fears this might escalate into something bigger. But oil tanker traffic in and out of the Persian Gulf has almost halted, which - to me - says there’s scope for oil prices to keep rising. This post gives elasticities for key currencies and other assets with respect to the Brent oil price based on Russia’s invasion of Ukraine in 2022.

The chart above is derived from price action in the first quarter of 2022 when Russia invaded Ukraine. The Brent oil price rose 40 percent during that quarter and Brazil’s Real rose almost 20 percent. The chart shows the elasticity of the Brazilian Real to that oil price rise, which is just below 0.5. It shows equivalent elasticities for other major currencies in blue, for gold in red and for the S&P 500 in orange.

If, for example, the five percent rise in Brent is sustained, that implies a roughly two percent rise in the Brazilian Real against the Dollar now. Similarly, it implies a one percent drop in Turkish Lira versus the Dollar. These are relatively small numbers because the rise in Brent is - so far - relatively modest. Should that change, the chart above provides a roadmap for how markets might trade based on Q1 2022.