GLOBAL CONTEXT
Oil market in a race against time
The conflict in Iran and the subsequent closure of the Strait of Hormuz, which typically saw 20% of global liquid natural gas and 25% of global seaborne oil trade pass through it, represents the largest oil supply shock in history. However, you have to look hard to see evidence of this in financial markets.
The new deal between Iran and the US should allow the Strait to reopen and oil flows to resume. However, it will take time for the market to return to normal and any peace agreement will be fragile.
Oil prices have risen from around $60 per barrel to $79 and the price of natural gas has risen from about 78p per therm to 97p. That’s a steep rise in a short period of time. But it’s well short of the $128 and 640p per therm peaks reached after the invasion of Ukraine.
The main reason for the relatively subdued reaction from energy markets is that coming into this crisis the global oil market was relatively well supplied with stocks at the highest since February 2021. Those stocks have been run down at a record rate, limiting any supply shortages. Some demand destruction in Asia has also helped to offset the supply shortage.
The new deal between Iran and the US should allow the Strait to reopen and oil flows to resume. However, it will take time for the market to return to normal and any peace agreement will be fragile. Best estimates suggest that excess stocks will be run down by the end of June and operating stocks will have reached critical levels by September. If supply from the region has not resumed by then, energy prices are likely to surge.
The relatively muted reaction in energy prices means that most of the economic pain has, for now at least, been focused in Asia. The IMF expects growth in the region to slow from 5.0% in 2025 to 4.4% this year. But it has also revised down global growth by 0.2ppts and thinks inflation in most developed countries will rise to 2.8% this year.
Unfortunately, the UK is more exposed to the inflationary consequences of global energy price shocks than other developed countries due to the primary role of gas in setting electricity prices and our reliance on imported energy. That is why the IMF has upgraded its inflation forecast and downgraded its growth forecast for the UK by more than any other developed country.
However, unless energy prices rebound again, we think the impact on the UK is likely to be another dose of flat growth, rather than a slumping into a recession.
