Oil Markets Are Still on Edge After Months of Conflict. Here's What the Recent Escalation Between Iran and Israel Could Mean for Investors in 2026.

Oil prices continue to whipsaw amid volatile tensions in the Middle East.

Iran and Israel both recently fired missiles at one another for the first time since the U.S. and Iran reached a ceasefire agreement in April.

On Sunday, Iran lobbed missiles at Israel, attributing the attack to Israel’s bombing of suburbs in Southern Beirut in Lebanon, according to various media outlets.

Israel then hit back Monday with a “large-scale strike on strategic defense systems.”

Following this, Iran said it had halted strikes, but would resume them if Israeli forces continued to conduct airstrikes in Lebanon.

However, Israeli Prime Minister Benjamin Netanyahu said the war against Iran and its Lebanese proxy group Hezbollah “has not yet ended.”

Trump has told both sides to cease strikes. Axios, citing a senior U.S. official and Israeli source, also reported that Trump has told Netanyahu to hold off on further retaliation so diplomacy can continue.

But until a firmer agreement is in place, oil markets are likely to stay on edge. Here’s what that could mean for investors in 2026.

The oil markets need clarity

Uncertainty is an investor’s nightmare, and it’s no different in the oil markets.

While tensions continue, the Strait of Hormuz, a narrow passage of water bordering Iran and Oman through which one-fifth of global oil supply passes in normal times, remains at a standstill.

Image source: Getty Images.

As of this writing, people using the prediction markets on Kalshi assigned a 66% likelihood that the Strait of Hormuz would not return to normal traffic until January.

Even if a longer-term deal is worked out tomorrow between the U.S., Iran, and Israel, it will still take time for supply chains to normalize.

Following the conflict, oil prices are unlikely to return to pre-war levels because the market now knows that Iran can close the Strait fairly quickly and wreak havoc on oil prices, so that risk will become embedded into prices, likely in perpetuity.

Oil prices have actually held up better than most might have thought, given everything that’s happened. As of this writing, WTI crude oil futures traded around $91.38 per barrel.

While oil is not included in core inflation, considering it is more volatile than other consumer prices, it can make everything in the economy more expensive, exacerbating affordability issues and driving up headline inflation.

So higher oil prices could continue to weigh on the consumer, on whom the U.S. economy is heavily reliant.

Ultimately, the longer oil prices remain elevated, the more inflationary pressures continue to weigh on the economy, potentially forcing the Federal Reserve to contemplate an interest rate hike, which investors likely wouldn’t respond well to.

The worst appears to be over, but the Strait still needs to open

If there’s anything positive to take away from this recent standoff between Iran and Israel, it’s that Trump does not seem to have any desire to restart hostilities.

Midterm elections are approaching, and Trump will want to see oil prices and inflation abate, while also reaching a longer-term nuclear agreement with Iran.

That said, Trump is always unpredictable, as is everything in the Middle East, so investors should not assume that tensions can’t re-escalate in a hurry.

That’s why I wouldn’t recommend trading based on near-term events in the Middle East.

However, if there is an agreement sometime soon, oil prices should decline, which would be positive for the market, so things still could go right this year and provide a near-term catalyst for the market.

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