How Iran’s missile campaign against Gulf Arab states is building the case for direct Saudi retaliation — and what happens to energy markets and forex if Saudi-Iran conflict

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Part One: Iran’s Missile Campaign Against the Arab Gulf — What Has Already Happened

The Trigger: Operation Epic Fury and the Death of Khamenei

The Middle East’s fragile equilibrium fractured on February 28, 2026. The United States and Israel launched coordinated strikes on Iran under Operation Epic Fury, targeting military facilities, nuclear sites, missile infrastructure, and leadership compounds. Supreme Leader Ali Khamenei was killed. Within hours, Iran’s IRGC launched what it called Operation True Promise IV — a massive, multi-front retaliation that extended far beyond Israel and US military installations, reaching into the capitals and energy arteries of countries that had publicly distanced themselves from the conflict. The question now gripping every capital from Riyadh to Washington is whether Saudi Arabia attacks Iran next — and what that would mean for the world.

The speed of Iran’s response stunned analysts. Former CIA director David Petraeus described the immediate targeting of neutral Gulf states as likely a strategic error, but the IRGC pressed on regardless, even after President Pezeshkian issued an apology to neighbouring countries and ordered a halt to the strikes. The IRGC’s defiance of the civilian president exposed a profound leadership rift inside Tehran at the very moment the Islamic Republic was fighting for its survival.

Mojtaba Khamenei — the slain Supreme Leader’s son — was elected as his father’s replacement on March 8. His first public statement on the Strait of Hormuz was unambiguous: it would remain closed as a tool of strategic pressure until the enemy backed down. Every day the Strait stays shut raises the probability that Saudi Arabia attacks Iran directly.

Iran’s Attacks on Gulf Arab Countries: The Full Picture

Iran’s justification — that it was striking US bases, not host nations — was rejected immediately by every Gulf government. Qatar’s Prime Minister described the attacks as a ‘big sense of betrayal.’ The UAE reported 165 ballistic missiles, 2 cruise missiles, and 541 drones fired at its territory in a single wave. Saudi Arabia’s foreign ministry condemned what it called ‘reprehensible Iranian aggressions’ and stated explicitly that the Kingdom would take all necessary measures, including the option of direct retaliation. The cumulative weight of these strikes is precisely what makes the scenario of Saudi Arabia attacking Iran increasingly credible — and increasingly discussed inside the kingdom.

Documented Iranian Strikes on Gulf Arab States — February–March 2026

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The pattern of strikes reveals a deliberate strategic logic. Iran targeted three categories simultaneously: US military bases to impose costs on American operations; energy infrastructure to raise the economic pain on host governments; and civilian and symbolic sites — the Palm Jumeirah, the Burj Al Arab, major airports, to shatter the Gulf’s reputation as a safe, investable region. The message was designed to be impossible to ignore. It is also the message that is pushing Saudi Arabia closer to the moment of decision on whether to attack Iran directly.

The Strait of Hormuz: A Real Closure, Not a Theoretical Risk

On March 2, a senior IRGC commander declared the Strait of Hormuz closed. Within 24 hours, Iranian forces attacked five commercial ships attempting to transit. By March 8, the UK Maritime Trade Operations Centre had logged at least ten attacks on vessels, with five crew members killed. War-risk insurance premiums surged to levels that made commercial transit economically impossible for most operators — meaning the strait was effectively closed by the insurance market even for ships Iran chose not to physically attack.

The scale of the disruption is historic. The oil production of Kuwait, Iraq, Saudi Arabia, and the UAE collectively dropped by a reported 6.7 million barrels per day by March 10, and by at least 10 million barrels per day by March 12 — the largest supply disruption in the history of the global oil market. Roughly 150 freight ships, including dozens of oil tankers, sat idle on both sides of the strait. The IEA took the unprecedented step of announcing a coordinated release of 400 million barrels from emergency reserves — the largest such action in history — but analysts noted this equalled only approximately 20 days of normal Hormuz flow.

Hormuz Shutdown — Real Flow Disruptions as of Mid-March 2026

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Iran’s Strategic Playbook: Three Levers of Pressure

Iran holds three distinct levers of escalation, and it has already deployed all three simultaneously. Understanding each lever is essential for traders trying to assess the duration and intensity of the current crisis — and the conditions under which Saudi Arabia attacks Iran directly, transforming the conflict’s entire character.

Iran’s Strategic Levers — Methods, Targets, and Market Impact

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The proxy dimension deserves particular attention. Hezbollah’s re-entry into active combat after Khamenei’s death opened a second front that diverts Israeli and US military attention northward, stretching the coalition’s operational capacity. Israel struck IRGC Quds Force commanders meeting at a Beirut hotel on March 9, killing five — an operation that simultaneously degraded Hezbollah’s command structure and signalled Israel’s willingness to operate on Lebanese soil regardless of prior ceasefire arrangements. The Lebanon front has since claimed at least 390 lives.

The Deterrence Miscalculation

Iran’s logic is textbook deterrence theory applied under extreme duress: impose a cost on every country that hosts or enables US operations, regardless of whether those countries formally joined the war. The calculation is that Gulf states will eventually pressure Washington to negotiate rather than endure indefinite economic damage. The miscalculation — noted by Petraeus and echoed by Qatar’s prime minister — is that attacking countries that publicly opposed the war have transformed potential mediators into adversaries, and have given Saudi Arabia a legitimate casus belli if it chooses to attack Iran directly.

Part Two: If Saudi Arabia Attacks Iran — Scenario Analysis

The Current Saudi Position: On the Precipice

Saudi Arabia has not yet attacked Iran. But it is closer to that threshold than at any point in modern history. Iran has struck Saudi Arabia’s Ras Tanura refinery — one of the largest in the world, with 550,000 barrels per day of capacity — targeted the US Embassy in Riyadh, damaged US refuelling aircraft at Prince Sultan Air Base, and repeatedly struck the Shaybah oilfield. Saudi Arabia has raised its military to full alert, MBS has authorised a military response contingent on further attacks, and has secured explicit backing from President Trump. The only open question is when — not whether — the conditions for Saudi Arabia to attack Iran will be met.

Yet Saudi Arabia has not struck back. The restraint reflects a strategic calculation that Professor Bernard Haykel of Princeton University articulates precisely: Saudi Arabia is terrified not of the war, but of what comes after. ‘They don’t want a failed state with 92 million people next door,’ Haykel told the Jerusalem Post. ‘That seems quite normal when you are next to Iran, whereas Israel is a thousand kilometers away and doesn’t care.’ MBS fears the post-war vacuum — a collapsed Iranian state generating refugee flows, Shia unrest, and ungoverned territory on his northern border — as much as he fears Iranian missiles.

The calculus shifts, however, if Iran mounts what a source close to the Saudi government described to AFP as ‘a concerted attack on Aramco.’ At that point, Saudi Arabia’s attack on Iran is no longer a political decision — it becomes a strategic imperative. The question is no longer whether the kingdom can retaliate, but whether the cost of continued restraint exceeds the cost of direct action.

What Happens When Saudi Arabia Attacks Iran

Saudi Arabia’s most potent option if it attacks Iran is a strike on Kharg Island — Iran’s primary crude export terminal, which handles approximately 90 percent of Iranian oil exports. The US has already struck military targets on Kharg Island (CENTCOM confirmed strikes on 90+ targets while ‘preserving oil infrastructure’). If Saudi Arabia attacks Iran with strikes aimed at that export infrastructure, Iranian crude flows to China — currently one of Tehran’s few remaining revenue streams — would be severed. This would escalate Iran’s economic desperation and almost certainly trigger the full Hormuz mining scenario.

 Saudi Arabia Attacks Iran — Scenario Dimensions and Market Consequences

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A GCC coalition response is also possible. Analysts at Al Jazeera have noted that Gulf states are more likely to act through a joint GCC structure — the Unified Military Command — rather than be seen as working alongside Israel. The Peninsula Shield Force, the GCC’s unified army, was created precisely for this scenario. Its activation would represent a fundamental transformation of the conflict from a US-Iran bilateral confrontation into a full regional war, with Saudi Arabia attacking Iran at the head of a multi-state coalition.

The Leadership Rift That Could Determine Everything

One of the most important and underreported dynamics of the current crisis is the fracture inside the Iranian government itself. President Pezeshkian apologised to Gulf states and ordered the IRGC to stop strikes against them. The IRGC ignored the order and continued. This is not a minor procedural disagreement — it represents a fundamental breakdown between the civilian government seeking a negotiated exit and the IRGC pursuing a maximalist military strategy under the new Supreme Leader Mojtaba Khamenei.

For Saudi Arabia, this rift creates both an opportunity and a danger. The opportunity: a negotiated de-escalation through Pezeshkian’s government remains theoretically possible, and Trump has indicated Iran’s new leadership wants to talk. The danger: even if a diplomatic track opens, the IRGC can continue strikes independently of whatever the civilian government agrees. This makes any ceasefire fragile — and makes the scenario of Saudi Arabia attacking Iran more likely with each IRGC provocation that the civilian government cannot control.

Part Three: Financial and Forex Market Implications

Energy Markets: The Price Trajectory Under Each Scenario

Brent crude rose from approximately $70 per barrel before the war to over $110 within days, before settling in the $90–$103 range as of mid-March. Goldman Sachs estimated, as of March 3, that traders demanded approximately $14 more per barrel than before the conflict to compensate for the increase in risk — roughly equivalent to the price impact of a full four-week halt in Hormuz flows. If Saudi Arabia attacks Iran and Kharg Island export infrastructure is targeted, Goldman Sachs’ own modelling suggests prices could push into the $130–$150 range.

The natural gas picture is, in some respects, even more acute. European TTF prices nearly doubled after QatarEnergy announced a halt to gas production following drone strikes on Qatari facilities on March 2. Goldman Sachs projects that a disruption of Hormuz LNG flows lasting more than two months would push TTF above €100 per megawatt-hour — levels not seen even during the worst of the 2022 energy crisis. Should Saudi Arabia attack Iran and the conflict extend through Q2, this is no longer a tail scenario — it becomes the base case.

Energy Market Price Trajectory — Current Levels and If Saudi Arabia Attacks Iran

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Forex Markets: The Currency Hierarchy Under Conflict

The 2026 Iran war has confirmed a well-established pattern in forex markets: energy shocks of this magnitude trigger a structural repricing of the entire global currency hierarchy, not merely a regional risk premium. The mechanism runs through three channels simultaneously — the oil price itself, the safe-haven demand it generates, and the stagflation pressure it creates for energy-importing economies. If Saudi Arabia attacks Iran and the conflict escalates further, all three channels intensify simultaneously.

Bloomberg reported on March 13 that market stress was building at the fastest pace since last year’s tariff shock, as the Iran war pushed oil prices higher, drove up borrowing costs, and strengthened the dollar simultaneously. An index tracking emerging-market currencies recorded its worst session since November 2024 on March 2. The Saudi Tadawul All Share Index fell 12 percent in the first week of March, erasing approximately $300 billion in market capitalisation.

 Forex and Financial Markets — Directional Analysis Under the 2026 Iran War

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The ‘Smiling Dollar’ Dynamic

The most important currency concept for traders to understand in this environment is what analysts at The5ers call the ‘Smiling Dollar’ phenomenon. The US dollar strengthens regardless of whether global growth accelerates or collapses — it benefits from risk-on dollar demand in growth scenarios and from safe-haven flows in risk-off scenarios. A Middle East energy war, and especially the scenario of Saudi Arabia attacking Iran, occupies exactly the space where both drivers fire simultaneously: energy inflation is initially bullish for dollar oil revenue, while the associated panic generates safe-haven demand for the world’s reserve currency.

The practical trading implication is a two-stage playbook. In the first 60 minutes following any new escalation headline — including if Saudi Arabia attacks Iran — the Japanese yen is the superior reactive play, as carry trades unwind immediately. Once the initial volatility peak passes, the structural rotation into USD asserts itself over days and weeks. Traders who miss the JPY spike and chase it into the retracement frequently suffer precisely because they have not mapped this temporal structure.

The Saudi Riyal: Peg Under Wartime Stress

The Saudi riyal’s dollar peg — fixed at 3.75 SAR/USD since 1986 — is the monetary bedrock of the Gulf Cooperation Council’s shared financial architecture. The UAE dirham, Qatari riyal, Bahraini dinar, and Omani rial are all pegged to the dollar through similar mechanisms. If the peg broke, the consequences for regional monetary stability would be severe.

The peg is currently under stress but not at the breaking point. Saudi Arabia is selling crude at $90–110 per barrel — significantly above the $65–70 assumed in the 2026 budget — which generates a per-barrel windfall even at reduced export volumes of 4.5–5 million barrels per day through the East-West pipeline bypass. However, if Saudi Arabia attacks Iran and the conflict extends into Q2, the fiscal deficit could reach 8–12 percent of GDP, forcing SAMA to choose between drawing reserves or cutting Vision 2030 megaproject expenditure.

Equities, Stagflation, and the Central Bank Dilemma

Global stock markets have repriced the war in real time. The Dow Jones fell over 400 points on March 2. The S&P 500 dropped 0.7 percent on the same day. Asian exchanges in Tokyo, Seoul, and Hong Kong opened sharply lower on March 13 following oil’s 9 percent surge. The sectoral pattern is predictable but important: energy companies and defence contractors have broken away from the broad index with relative outperformance, while airlines, energy-intensive industrials, and consumer discretionary names have been sold aggressively. If Saudi Arabia attacks Iran, a second major repricing wave across all these sectors is expected.

The more serious macro threat is stagflation. The US consumer price index stood at 2.4 percent in January 2026. Economists now warn that the oil shock could wipe out those gains entirely, while simultaneously suppressing demand and growth. Central banks that had planned to cut rates in 2026 face an impossible dilemma: inflation driven by an external supply shock is not amenable to interest rate policy, but raising rates into an energy-induced slowdown risks accelerating recession. Morgan Stanley warned explicitly that prolonged conflict — and especially the scenario of Saudi Arabia attacking Iran — could lead to ‘higher oil prices, hotter inflation, and greater market uncertainty.’

The Trader Playbook: Six Rules for This Regime

Managing risk in this environment requires a structured framework rather than a reaction to individual headlines. The six rules below anchor both the energy futures and forex dimensions of the crisis — including the full escalation scenario of Saudi Arabia attacking Iran — into a coherent, executable approach.

The Gulf War Trader Playbook — Rules, Actions, and Data Sources

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Conclusion: The Threshold Between Restraint and Escalation

Saudi Arabia has not yet attacked Iran. But the current conflict has placed Riyadh in a position that no amount of diplomatic language can fully obscure: its oil infrastructure is on fire, its US partner’s aircraft have been damaged on its soil, and its military is at full alert with retaliation pre-authorised by the Crown Prince. The threshold narrows with every drone Iran sends toward Shaybah. The scenario of Saudi Arabia attacking Iran is no longer a remote contingency — it is an event that markets need to price actively.

For traders and macro investors, the critical insight is that this is no longer theoretical. The Strait of Hormuz is effectively closed. The largest supply disruption in the history of the global oil market is unfolding in real time. The question is not whether markets need to price the current crisis — they already are. The question is whether they are pricing it correctly for a scenario where Saudi Arabia attacks Iran, crosses its own red line, and transforms a US-Iran conflict into a regional war encompassing the world’s two largest oil exporters simultaneously.

Geopolitical risk is never fully priced until the tankers stop moving. The tankers have stopped. The next question is whether the refineries stop too.

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