By CT Smith Research
Colombo, March 6 – A coordinated military campaign by the United States and Israel against Iran has triggered renewed volatility in global financial markets and raised concerns about potential disruptions to global energy supplies.
The operation, launched over the weekend of 28 February 2026, prompted swift retaliation from Iran and intensified tensions across the Middle East. Iran carried out strikes targeting Israeli territory and US military installations in the region and announced the closure of the Strait of Hormuz, a critical shipping route through which roughly 20 percent of global oil trade passes. The development immediately heightened fears of major disruptions to energy supplies and international trade.
Energy markets reacted quickly to the escalating conflict. Brent and WTI crude oil prices rose by 6.09 percent on 2 March and climbed another 5.35 percent the following day as investors priced in the risk of a prolonged war. At the same time, investors moved toward safe-haven assets, pushing the US Dollar Index up by 1.45 percent and placing pressure on emerging market currencies, including the Sri Lankan rupee.
The conflict has also affected key energy infrastructure across the region. Attacks on Qatari liquefied natural gas facilities halted around 20 percent of global LNG supply, sending European gas prices sharply higher. Drone strikes on Saudi Arabia’s Ras Tanura refinery forced partial shutdowns and tightened oil output, adding further strain to global energy supply chains.
Shipping and trade have also been affected. Rising geopolitical tensions and the rerouting of vessels away from the Strait of Hormuz and the Red Sea have pushed up insurance premiums and freight costs. These developments are expected to increase the cost of transporting oil and other goods across international markets.
For Sri Lanka, the conflict poses several economic risks. As a net importer of oil with strong economic links to the Middle East, the country is particularly vulnerable to rising energy prices and disruptions to trade.
Higher global oil prices could significantly increase Sri Lanka’s import bill while placing pressure on the rupee and contributing to higher inflation. Fuel imports accounted for about 19 percent of the country’s total import bill in 2025, making the economy sensitive to fluctuations in global energy prices.
Several key sectors face heightened exposure. The energy sector remains the most vulnerable because of its reliance on imported fuel. Tourism could be affected by disruptions to major Middle Eastern transit hubs, while tea exports may face weaker demand and logistical challenges. Apparel exports, aviation, maritime services, and manufacturing may also encounter higher freight costs and supply chain delays.
Tourism could face immediate challenges. A large share of flights bringing European visitors to Sri Lanka pass through Middle Eastern transit hubs such as Dubai, Doha, Abu Dhabi, and Sharjah. These routes account for about 61 percent of arrivals from the United Kingdom and Europe, which together represented 57.4 percent of total tourist arrivals in January 2026. Disruptions in these routes could affect high-spending European travellers during the peak travel period in March.
Remittances, which are Sri Lanka’s largest source of foreign currency, could also be affected. The country received more than eight billion US dollars in remittances in 2025, with about 80 percent coming from workers in the Middle East. Continued instability in the region may encourage overseas workers to hold back transfers temporarily as a precaution, slowing inflows to the economy.
The tea industry also faces risks because around 52 percent of Sri Lanka’s tea exports are destined for Middle Eastern markets. The sector’s heavy reliance on the region makes it vulnerable to geopolitical disruptions that could affect both demand and shipping routes.
Despite these risks, Sri Lanka’s equity market has shown resilience. The Colombo Stock Exchange’s All Share Price Index recently reached record highs, supported by improving macroeconomic conditions and stronger investor confidence. While geopolitical tensions have triggered short-term market corrections, investors have continued to show interest in fundamentally strong companies.
If the conflict continues, economists warn that the global economy could face sustained pressure from rising energy and commodity prices. For Sri Lanka, prolonged instability could translate into higher import costs, currency pressure, and rising inflation. However, disruptions to tourism may gradually ease as airlines adopt alternative travel routes, and oil prices could moderate if tensions in the region begin to ease.
The above research and findings are presented by CT Smith, a leading Sri Lankan capital market service provider with a 30-year track record. The firm offers Investment Banking, Stock Broking, and Asset Management services through its fully owned subsidiaries: CT Smith Capital (Pvt) Ltd, CT Smith Securities (Pvt) Ltd, and CT Smith Asset Management (Pvt) Ltd.
