In its latest weekly macro update, Exante examines how an escalating Middle East conflict is sending shockwaves through global energy markets, forcing emergency responses from institutions ranging from the International Energy Agency (IEA) to individual European governments.
The IEA agreed on Wednesday to release 400m barrels from emergency oil reserves in an effort to contain spiralling prices — a volume that dwarfs the 183m barrels released following Russia’s invasion of Ukraine in 2022, making it the largest such action in the agency’s history. President Trump has also signalled his intention to draw on the US Strategic Petroleum Reserve, which currently holds around 415m barrels, roughly half its total capacity, after a series of drawdowns under the previous Biden administration.
However, the scale of the response may still fall short. A near-halt to flows through the Strait of Hormuz has left vast quantities of crude and refined fuels stranded in storage, unable to reach their destinations. The disruption has sent oil and gas prices sharply higher, stoking fears of a fresh inflationary wave across the global economy.
Within Europe, the European Commission is weighing options to subsidise or cap gas prices to offer consumers immediate relief. European Commission president Ursula von der Leyen said the bloc is looking to “deliver relief now” following the spike in energy costs, a development compounded by Shell declaring force majeure on certain LNG shipments to Asia. Individual member states are also acting unilaterally: Germany plans to limit petrol station price changes to once daily, Greece is capping fuel and grocery retailer profit margins, and Italy is exploring the redistribution of windfall VAT revenues to households. Austria is expanding its strategic gas reserves and accelerating household power price caps, while France is monitoring fuel markets for irregular pricing. Poland and the Czech Republic, meanwhile, are pushing for looser EU carbon pricing rules to ease industrial pressures.
Despite the flurry of activity, Exante warns that markets may be underestimating the longevity of the disruption. A prolonged period of elevated oil prices could push Europe into stagflation, combining weak growth, supply chain strain, higher food costs — as fertiliser prices track energy higher — and tighter monetary policy.
The bind is equally acute for the US Federal Reserve. February’s CPI data, which showed headline inflation at 2.4% year-on-year and core at 2.5%, offered a relatively calm picture before the Middle East escalation changed the calculus entirely, Exante said. Since hostilities began, petrol prices have surged around 19% in just a fortnight, and analysts estimate that every additional $10 on a barrel of crude adds roughly 0.2 percentage points to CPI. Two-year inflation breakevens have climbed from around 2.5% to above 3.2%, a repricing of 70 basis points, while market pricing has pushed the expected timing of the Fed’s first rate cut from June back to October.
As Exante highlights, the Fed is caught in a classic stagflationary bind — inflation expectations rising from an external shock it cannot control, while deteriorating employment conditions argue for easing. Whether policymakers choose to look through the energy-driven price surge or respond hawkishly may prove to be one of the defining monetary policy decisions of the year.
For more insights, read the weekly report here.
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