Pakistan faces renewed inflation risk as crude oil jumps on Middle East tensions

LAHORE: A renewed surge in global oil prices following the collapse of Islamabad-mediated talks between the United States and Iran has erased a brief period of market calm, exposing import-dependent economies such as Pakistan to fresh inflationary pressure.

Crude oil prices climbed back above $100 per barrel on Monday after US President Donald Trump signalled possible restrictions on the Strait of Hormuz, a key global energy shipping route, following the failure of negotiations to produce a breakthrough.

The Strait of Hormuz handles nearly one-fifth of global oil trade, and any disruption—or even the threat of it—typically triggers immediate volatility in international energy markets.

Market reaction intensified after over 20 hours of inconclusive talks in Islamabad, with analysts saying renewed geopolitical signalling around Iranian oil shipments pushed prices sharply higher. Brent crude recorded gains of between 6% and 8% in early trading, with forecasts warning of further increases if tensions persist.

A senior official in Pakistan’s private oil sector said the latest spike was being driven as much by shifting expectations as by supply concerns.

“The problem this time is not just supply fears, it’s the collapse of market confidence after a short-lived diplomatic window,” the official said. “That reversal is making the price spike sharper than usual.”

For Pakistan, the development comes at a sensitive time, with the government having recently adjusted fuel prices downward. On Friday, petrol was reduced by Rs12 per litre and diesel by Rs135 per litre in an effort to ease inflationary pressure.

Analysts say sustained increases in global crude prices could quickly reverse that relief by widening the import bill, weakening the rupee, and complicating fiscal management.

“Every $10 increase in oil prices adds significant pressure on Pakistan’s current account and directly feeds into domestic inflation,” the official said. “If this situation prolongs, it will force difficult decisions on fuel pricing and subsidies.”

Petroleum imports account for a major share of Pakistan’s external payments, making the economy highly sensitive to global price fluctuations. A renewed rally in oil prices is expected to feed into transport costs, electricity tariffs, and food inflation in the coming weeks.

Globally, equity markets showed mixed reactions, while energy stocks strengthened on expectations of tighter supply conditions. Early estimates suggest crude prices rose by 6% to 8% immediately following the latest escalation.

Analysts say what distinguishes the current episode is the so-called “false dawn” effect, where markets briefly priced in stability before rapidly reversing expectations.

“Markets had begun adjusting to the idea that the worst was over,” the official said. “Now they are being forced to re-price risk at a much higher level.”

Beyond oil markets, analysts warn that prolonged uncertainty around the Strait of Hormuz could increase shipping insurance costs and freight rates, further affecting global supply chains, particularly for food-importing economies.

They say even if tensions ease, the geopolitical risk premium built into oil prices is unlikely to dissipate immediately, leaving markets exposed to continued volatility.