Weekly Winzer: The energy price shock in the Middle East

The war in the Middle East continues to shape developments on the financial markets – primarily due to rising energy prices, as the Strait of Hormuz is effectively blocked. The strait between Oman and Iran is considered a key route for global oil trade.

The crucial question is whether the energy price shock of recent weeks is sufficient to jeopardise the fundamentally positive base-case scenario. The greatest uncertainty relates to both the extent and the duration of the price increase. Both parameters are closely linked to the length of the conflict.

How much longer will the war in Iran last?

How the war will unfold, remains highly uncertain. US President Donald Trump did indeed state last Monday that the war against Iran was “almost over” or would be “over very soon”. The markets initially reacted with rising share prices and falling oil prices – a sign that, whilst his statements are not being taken literally, they are certainly being taken seriously.

However, the recovery did not last long, as hostilities have continued since then. If the US military operation in Iran drags on for too long, it could stand in the way of a lasting stabilisation of the energy markets. Also, it remains unclear whether an end to the war from the US perspective would also mean an end to the war for Iran and Israel. Iran appears to continue banking on its strategy of driving up the costs of the conflict through attacks on oil tankers and infrastructure in the Persian Gulf. Nor does the election of Mojtaba Khamenei as the new Supreme Leader provide any indication of a possible change of course.

The Strait of Hormuz: the bottleneck the world is watching

The closure of the Strait of Hormuz has an impact via three main channels, driving up prices in every respect:

• Energy supply: the bottlenecks are driving up prices for crude oil and liquefied natural gas (LNG). About 20% of global trade in crude oil and natural gas passes through the straits. According to the International Energy Agency (IEA), the options for diverting traffic are severely limited. The maximum alternative transport capacity for crude oil is just 2.6 million barrels per day.
• Fertilisers: around a third of the global fertiliser trade passes through Hormuz. This increases the pressure on food prices, which are already under strain.
• Transport costs: diversions to alternative routes lead to longer supply chains, rising insurance premiums, and higher overall transport costs.

In an effort to calm the markets, the IEA announced the release of 400 million barrels from emergency reserves. This is the largest coordinated release of oil reserves in its history. The release will take place gradually across all member states and without a fixed timetable. A rough calculation shows that, given a shortfall of 20 million barrels per day, this provides a time buffer of about 20 days. However, this remains purely a stopgap measure. A structural solution will only be found once the Strait of Hormuz reopens.

Central banks are becoming more cautious

Even now, we can make some rough predictions about the consequences of the war:

• Higher inflation: a sharp rise in inflation figures of a few tenths of a percentage point in March and April is highly likely. The question, of course, is what will happen after that.
• Slower economic growth: the indicators point to robust global growth above potential in the first quarter of 2026. However, higher prices and a likely decline in sentiment will dampen this scenario slightly.
• Cautious monetary policy: we are faced with the dilemma that the recent surge in prices is weighing on both inflation and economic growth. We will soon see how monetary policymakers actually respond: seven major central banks have their meetings scheduled for this week. The starting point is inflation above 2% for the fifth consecutive year. None of these institutions is expected to change its key-lending rates. To prevent pass-through and second-round effects, the tone is nevertheless likely to be rather anti-inflationary (“hawkish”). Particular focus is on the US Federal Reserve’s meeting on Wednesday and that of the European Central Bank (ECB) on Thursday.

From a macroeconomic perspective, “inflationary growth” remains the base-case scenario. Depending on the region, this implies growth at or above the trend rate, alongside inflation slightly above the central banks’ 2%-target. In other words, an environment that, according to the textbook, is generally favourable for risky asset classes such as equities. It is important, however, that the stagflationary impulse triggered by energy prices remains limited. This would be crucial for the situation to calm down in the second quarter.

At present, we can only speculate on the scale of the price surge – in terms of both its duration and magnitude, and thus its impact on the economy. This is because there are numerous questions surrounding this issue, none of which, unfortunately, can be answered satisfactorily. They include how long the war will last, how long Iran can effectively keep the Strait of Hormuz closed, and whether the war will spread to other countries in the Gulf region.

How do we respond in our positioning?

Given that the geopolitical situation remains extremely uncertain, we are implementing a traditional risk-reduction measure in our portfolios: we are reducing the equity allocation from neutral to underweight while increasing the allocation to the euro money market. Historically, equities have underperformed during periods of stagflation. Rising energy costs are having a negative impact in two ways:

• Cost pressures: costs are rising faster than the ability to pass on price increases. This is putting pressure on profit margins.
• Interest rates: higher inflation could lead to higher interest rates, whilst increased geopolitical risk is driving up risk premiums. Both factors are putting further pressure on share prices.

 

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