Europe Stocks Drop as Energy Prices Spike Over Iran War

A broadening conflict in the Middle East has sent Brent crude past $110 a barrel, paralysed tanker traffic through the Strait of Hormuz, and pushed European indices to their sharpest weekly decline in nearly a year.

Markets in Freefall as Iran War Widens

European equity markets have endured their worst stretch in almost a year as the US-Israel military campaign against Iran, which began in late February 2026, sends shockwaves through global energy markets. The pan-European Stoxx 600 index closed the week down 5.6%, with losses recorded in every major session. On Monday alone, the benchmark fell 1.7%, with London's FTSE 100 shedding roughly 2% and Germany's DAX declining close to 3%. All sectors apart from energy finished in negative territory.

The trigger is clear: Iran's decision to effectively halt maritime traffic through the Strait of Hormuz in retaliation for the strikes has removed around one-fifth of the world's daily oil supply from circulation. With approximately 200 tankers now stranded in the region and no clear timeline for the resumption of normal shipping, traders have been forced to price in a prolonged disruption. The resulting rally in crude oil has been extraordinary in speed and scale, with Brent at one point topping $119 a barrel before settling above $110 as of Monday morning.

How the Energy Crisis Unfolded

The initial shock hit markets on 2 March, when US and Israeli forces launched coordinated strikes on targets inside Iran, killing Supreme Leader Ali Khamenei. Oil prices jumped roughly 8% that morning, and European natural gas prices surged by around 20% in the same session, according to analysts at Bruegel who tracked the opening moves. What followed was a cascade of supply disruptions that steadily pushed prices higher throughout the week.

Iran's Revolutionary Guard Corps responded by closing the Strait of Hormuz to tanker traffic, a waterway through which approximately one in five barrels of oil produced anywhere in the world normally passes. Iran also launched retaliatory drone and missile strikes on energy infrastructure across the Gulf region. Qatar's state energy company QatarEnergy halted all liquefied natural gas production after its Ras Laffan facility was hit by an Iranian drone. Bahrain's state oil firm Bapco declared force majeure after a similar strike. Saudi Arabia and Kuwait also reported damage to production assets, with Kuwait subsequently cutting output.

Timeline of the Energy Shock

Europe's Energy Vulnerability in Focus

While Europe is less directly dependent on Gulf oil and LNG than Asian importers such as China, Japan, South Korea and India, the continent is far from insulated. Oil and natural gas are globally priced commodities, and any severe disruption to supply in the Strait of Hormuz drives prices up for every buyer regardless of where they source their energy.

Europe entered 2026 in a notably weak position in terms of gas storage. Reserves stood at approximately 46 billion cubic metres at the end of February, compared with 60 billion cubic metres at the same point in 2025 and 77 billion cubic metres in 2024. That shortfall means storage refill operations over the coming months, which are critical to European winter preparedness, could now face drastically higher input costs. Higher gas prices in turn feed directly into electricity prices and industrial margins, particularly for energy-intensive manufacturing sectors concentrated in Germany, Italy and the Netherlands.

Which Sectors Are Hit Hardest

The damage across European equity markets has been uneven. Airline and travel stocks bore the brunt of the initial sell-off, as Middle East airspace closures and the brief shutdown of Dubai Airport disrupted hundreds of flights and raised doubts about passenger demand across the summer travel season. Consumer discretionary stocks have also come under pressure as investors price in a squeeze on household spending power from higher fuel and energy bills.

The only consistent performers have been energy companies. Norwegian producers Vår Energi and Equinor rose 6% and 8% respectively on the first trading day following the outbreak of hostilities, as investors moved to capture the premium from surging oil prices. European defence stocks, while initially gaining on geopolitical tensions, have since traded mixed as the broader market rotation away from risk assets gathered pace.

Major European Index Performance

Quote from the Front Lines of Finance

The IMF's position reflects the central uncertainty now facing European policymakers. The European Central Bank, already navigating sluggish eurozone growth and a tentative disinflation trend, faces the unwelcome prospect of a renewed inflation surge driven entirely by external factors beyond its control. Economists at several major institutions have warned that a prolonged conflict could reduce eurozone growth by at least 0.1 percentage points while adding 0.5 percentage points to headline inflation.

Country and Regional Impact

Frequently Asked Questions

What Comes Next?

The trajectory of European markets in the coming days will be determined almost entirely by developments on two fronts: the battlefield and the diplomatic channel. European leaders, including Macron, Germany's Merz and Britain's Starmer, are pressing hard for a ceasefire, while EU Commission and Council presidents have intensified contact with regional leaders. If any ceasefire framework emerges, even a preliminary one, energy markets could reverse sharply lower and equities would likely stage a significant relief rally.

The selection of Mojtaba Khamenei as Iran's new Supreme Leader complicates the diplomatic picture considerably. Trump's immediate rejection of the successor as "unacceptable" suggests Washington is not preparing to offer Tehran an easy off-ramp. A sustained conflict lasting weeks rather than days would begin to erode European gas inventories at the precise moment when they need to be rebuilt for winter, potentially locking the continent into a prolonged period of elevated energy costs.

For European equity investors, the calculus is stark. A short, contained conflict followed by diplomatic normalisation would likely be absorbed with limited lasting damage to index levels. A prolonged war, particularly one that continues to target regional energy infrastructure and keeps the Strait of Hormuz closed, would materially reset growth and inflation forecasts for the eurozone, forcing the ECB to choose between controlling renewed price pressures and supporting a weakening economy. Either way, the days of relative market calm that characterised early 2026 now feel a very long time ago.