According to a report by the International Energy Agency (IEA), the war in the Middle East is causing the largest supply disruption in the history of the global oil market. The disruption to oil and gas flows through the Strait of Hormuz, and attacks on energy infrastructure across the region, have major implications for energy security and affordability – and for the world economy.
The war in the region, which began on 28 February, has impeded energy trade flows through the Strait. The global supply of liquefied natural gas (LNG) has been reduced by around 20% due to the situation. The IEA’s Executive Director has said the combined impacts amount to “the greatest threat to global energy security in history.”
Crude and oil product flows through the Strait of Hormuz have plunged from around 20 mb/d before the war to a trickle currently. With limited capacity available to bypass the crucial waterway, and storage filling up, Gulf countries have cut total oil production by at least 10 mb/d. In the absence of a rapid resumption of shipping flows, supply losses are set to increase. While the extent of losses will depend on the duration of the conflict and disruptions to flows, the IEA estimates global oil supply to rise by 1.1 mb/d in 2026 on average, with non-OPEC+ producers accounting for the entire increase.
Also, of significant concern, as a direct consequence of the Strait closure, fertiliser supply is particularly exposed. More than 30% of global trade of urea moves through the Strait, along with about 20% of trade of ammonia and phosphate. This creates risks for food prices and food security. Moreover, disruptions in this sector could have indirect effects on energy markets, since some countries use imported LNG to run domestic fertiliser plants. Additionally, the Gulf region produces around 8% of global aluminium supply, which is used in numerous energy technologies, as well as in construction and manufacturing. About 5 million tonnes of the metal are shipped each year through the Strait from smelters in Bahrain, Qatar, Saudi Arabia and the United Arab Emirates.It is important to note that disruptions to natural gas, fertilisers, aluminium, and helium amplify inflation risks, particularly via food and core goods, with Asia and key EMs most exposed.
Oil and natural gas prices have increased significantly since the war began. Brent crude futures surged by more than 60% in March. Dutch TTF, for example, the European benchmark for natural gas, rose by over 60%. Some oil product markets have also been particularly affected, including those for diesel and jet fuel, whose benchmark prices more than doubled in Asia in March.
Surging oil prices triggered by the Middle East conflict are likely to push global inflation (and, importantly, inflation expectations) higher. We have seen recent Eurozone inflation numbers for March, which showed an increase to 2.5% from 1.9%, and that was very much an energy-based effect. The concern is that we begin to see secondary effects, where producers of goods and services pass on their high energy costs to consumers.
Most central banks are discussing possible responses and stating their commitment to act, without immediate rate hikes, while waiting to observe the pass-through of the energy shock into their economies. It is important to understand that central banks appear patient, but the tilt towards higher rates will tighten as inflation risks (and particularly inflation expectations) firm.
In the USA, the FED faces mounting inflationary concerns while having been above its stated inflation target for more than 5 years. At the same time, the lingering job market concerns create two-sided risks towards achieving their dual mandate.
The surge in oil prices will push South African inflation higher. According to Morgan Stanley, for example, South African inflation is expected to accelerate temporarily, and growth is expected to take a hit this year, with inflation forecast to rise from 3.5% to a peak of about 4.3% in April, before easing to 3.4% by the end of 2026. Further interest rate cuts, which formed the base expectation for 2026, will most likely be delayed into 2027. Managing inflation expectations will be significant for the SARB and other inflation-targeting central banks.
What would concern us most, and certainly concern central banks, is if you begin to see the labour market responding in terms of higher pay growth to catch up with higher inflation. Now, those pay increases increase company costs, and they would be passed through into higher prices, into what we call second-round effects. They would tend to keep inflation higher for a prolonged or persistent period. That would be something which central banks are already on the lookout for, to make sure they don’t get caught out by higher inflation as they did a few years ago.
The war roiled financial markets in March. The SA All Share index lost 10,5% while the All-Bond index lost 6,8%. Money market conditions tightened significantly, with one-year bank rates moving higher by at least 1%. The Iran war sparked the biggest outflow in at least 6 years from the South African bond market as foreign investors lost their appetite for one of the most popular EM trades of recent months. For example, non-residents sold a net R41.3 billion of government bonds during the first week of the crisis, the largest weekly outflow on record since at least 2019. World markets were not spared either, with the S&P 500 losing 5% and the US 10-year bond trading 38 bp higher.
The two-week ceasefire recently announced by the US and Iran is, so far, the most concrete sign that the US administration has been seeking an off-ramp from the Iran conflict and has been very positively received by highly strung financial markets. There remain many additional points still to be negotiated, however, and reaching a final deal will not be easy or happen in a straight line.
It is important to note that while the announced ceasefire appears fragile, it will keep the Middle East risk elevated. Importantly, the ceasefire does not mean normalisation – shipping through the Strait and energy production will recover slowly without a durable peace agreement, and physical supply constraints will persist for months. Higher oil prices, tighter financial conditions, and rising policy uncertainty push downside risks for 2026 growth. The tentative ceasefire, which is already defined by repeated rejections of competing demands and allegations of violations, keeps the possibility of higher oil prices, heightened uncertainty, and greater financial market volatility intact. Global CPI could be firmer than most expectations. Consensus continues to price too little focus on the growth drag and too little emphasis on the inflation impulse, which poses risks to financial conditions and central bank actions. Based on the IEA estimates of potential oil supply shut ins near 10 mbpd, roughly 10% of global supply, with conditions deteriorating further through April, we would expect that the real economic conditions will worsen before stabilising and return to pre-war “normality.” Financial market risks will remain elevated during this period. Investors will need to carefully evaluate whether they are being compensated for the geopolitical instability risks in their positions.
END…
Issued by: Tega Shiimi ya Shiimi is the Chief Executive Officer for SanlamAllianz Investments.
Loading …
Leave a Reply