US strikes on Iran’s three main nuclear facilities come at a fragile moment for the global economy, and the outlook now hinges on how forcefully the Islamic Republic retaliates.
The World Bank, the Organisation for Economic Co-operation and Development, and the IMF have all downgraded their global growth forecasts in recent months. Any significant increases in oil or natural gas prices, or disturbances in trade caused by a further escalation of the conflict would act as yet another brake on the world economy.
“We’ll see how Tehran responds, but the attack likely puts the conflict on an escalatory path,” Bloomberg Economics analysts, including Ziad Daoud, wrote in a report. “For the global economy, an expanding conflict adds to the risk of higher oil prices and an upward impulse to inflation.”
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The rising geopolitical risks intersect with a potential escalation in tariffs in the coming weeks as US President Donald Trump’s pause of his hefty “reciprocal” levies is due to expire. The biggest economic impact from a prolonged conflict in the Middle East would likely be felt via surging oil prices.
Post the US strike, a derivative product that allows investors to speculate on price swings in crude oil surged 8.8 percent on IG Weekend Markets.
IG strategist Tony Sycamore said that if that move were to hold when trading resumes, he projected WTI crude oil futures would open at about US$80 per barrel.
In the extreme scenario in which the Strait of Hormuz is shut, crude oil could soar past US$130 per barrel, according to Daoud, Tom Orlik and Jennifer Welch. That could take the US consumer price index (CPI) near 4 percent in the summer, prompting the US Federal Reserve and other central banks to push back the timing of future rate cuts.
About a fifth of the world’s daily oil supply goes through the Strait of Hormuz, which lies between Iran and its Gulf Arab neighbors such as Saudi Arabia.
The US is a net exporter of oil. Higher crude prices would only add to the challenges the US economy is already facing. The Fed updated economic projections last week, marking down its forecast for US growth this year to 1.4 percent from 1.7 percent, as policymakers digested the impact on prices and growth of Trump’s tariffs.
As the largest buyer of Iranian oil exports, China would face the most obvious consequences from any disruption to the flow of petroleum, although its current stockpiles might offer some respite.
Any disruptions to shipping through the Strait of Hormuz would have a significant impact on the global liquefied natural gas (LNG) market, too. Qatar, which makes up about 20 percent of the global LNG trade, uses this route for exports and has no alternative passage.
That would leave the global LNG market extremely tight, pushing European gas prices significantly higher, Bloomberg Economics said.
While investors might be concerned that supplies could be interrupted if hostilities escalate, OPEC+ members, including de facto group leader Saudi Arabia, still have abundant spare capacity that could be activated. In addition, the International Energy Agency might choose to coordinate the release of emergency stockpiles to calm prices.
“The Middle East tensions represent another adverse shock to an already weak global economy,” Oxford Economics global macro research director Ben May said in a report ahead of the latest escalation. “Higher oil prices and the associated rise in CPI inflation would provide central banks with a major headache.”
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