The oil shock won’t matter much, unless it does

Stay informed with free updates

[L]et’s face it

says a note from ING economists published today

we’re not military experts, and there is no shortage of warnings about [the US/Israel-Iran war] morphing into a much larger supply shock for the global economy.

On day seven of the conflict, analysts remain deeply uncertain about what, exactly, is going to happen next. Which, to be fair, is an uncertainty seemingly also shared by the belligerents. The random daily markets narrative generator, meanwhile, has landed on: stacking it.

Global bond markets are suffering one of their biggest routs in recent years as inflation fears created by the Middle East conflict have forced traders to dump bets on interest rate cuts in big economies.
UK gilts are on track for their worst week since the country’s 2022 pension fund crisis, pushing the 10-year yield up 0.43 percentage points to 4.66 per cent. The US 10-year Treasury yield is up 0.19 percentage points at 4.15 per cent, the biggest rise since the trade war sell-off in April last year.

and

Global oil prices surged above $90 a barrel on Friday as more Middle Eastern crude production headed for a shutdown and investors braced for a protracted conflict in the Gulf.

The big fear, as ever, is inflation. After all, the conditions bear some spooky similarities to Russia’s 2022 invasion of Ukraine — another crisis that carried with it an energy shock and some deeply-misplaced assumptions things would be over quickly.

ING’s current base case is that the oil and LNGs flows will be disrupted for the next four weeks, which, they reckon, shouldn’t matter that much in a macro context. However, they’ve mapped out the potential impacts of a full quarter of disruptions:

In a sustained-disruption scenario, “the only solution would be higher prices to drive demand destruction”, writes ING head of commodities strategy Warren Patterson.

Bank of America analysts agree. “Only persistent oil spikes really matter” begins its analysts’ Global Letter today:

If the status quo persists, with oil prices around $15 higher than the pre-war level, we would fade (oil induced) inflation concerns. But an escalation driving oil prices persistently above $100 would become more concerning…

They continue:

The new conflict that just emerged in Iran, the consequences for the Strait of Hormuz, and the risks involved certainly amount to an oil supply shock. However, a market reaction like we have seen so far, with oil prices moving about 30% higher than the average of 2025, or 20% higher than a year ago may lead only to a modest transitory

inflation shock absent further and persistent escalation.

In Asia, which they expect to “bear the brunt” of the disruption, the level of disruption is also heavily dependent on duration:

If the oil shock turns out to be more than a transitory

change, with oil prices plateauing at a much higher level for longer, most Asian economies will likely witness downward pressure on growth through terms of trade losses, along with higher inflation.

Over at Morgan Stanley, economists think a modest oil price increase shouldn’t matter much:

Modest increases in oil prices, even if sustained, have transitory

effects on US headline inflation and minimal effects on US core inflation.

It leaves the Fed in a difficult spot:

On the one hand, a supply-side driven energy price move that pushes headline inflation higher while leaving underlying core inflation unchanged is good news for the Fed since, like tariffs, it means a one-off increase in oil prices does not put permanent upward pressure on inflation. Unlike tariffs, the speed of transmission to headline inflation is fast, with the peak effect on month-on-month rates of inflation reached about three months after the initial spike in oil prices. In contrast, we anticipate tariff pass-through to end about a year after tariffs were implemented.
Altogether — and all else equal — even though a 10% rise in oil prices would move a year-on-year rate of inflation 30-40bp higher, keeping headline PCE inflation at or above 3.0% for the remainder of 2026, the Fed could look through transitory

headline price pressures just as it is inclined to look through tariff-driven price pressures.

On the other hand

they continue, a sustained disruption could be disruptive enough to delay Federal Reserve easing efforts:

inflation has been above the 2% target for several years. The Fed may want to see evidence that headline price pressures are transitory

second round effects on core inflation are minimal, and inflation expectations remain stable. Even a modest 10% rise in oil prices – if sustained – could delay Fed easing even if they retain a “look through” bias.