Oil prices soar to highest since Russia-Ukraine conflict! Middle East war enters third month Market seriously underestimates the impact of "stagflation"

As the Iran war in the Middle East enters its third month, and international oil prices reach their highest point since 2022, the "stagflation risk" that affects global economic trends is quickly accumulating. The Strait of Hormuz remains completely closed to maritime transport under the joint blockade by the United States and Iran, prolonging the largest energy supply disruption crisis in global history. The financial markets are finding it increasingly difficult to ignore the economic costs and consequences being driven by the escalating Iran war. This geopolitical conflict has been ongoing for two months, and the global economy may soon face a toxic macroeconomic combination of slowing growth and high inflation, known as "stagflation." Even as tech stocks drive global stock markets up, some Wall Street analysts continue to warn that the longer the Strait of Hormuz remains effectively closed, the greater the risk of stagflation and even economic recession faced by the economies reliant on energy imports. Mike Bell, chief financial markets strategist at RBC BlueBay, said, "The probability of economic stagflation and recession occurring in Europe, the UK, and parts of Asia is much higher than the levels currently priced in by the stock market." Global benchmark crude oil prices surged over 5% in early Thursday Asian trading, reaching their highest level since June 2022 and surpassing $124 per barrel. West Texas Intermediate crude oil, the pricing benchmark for North American crude, approached $109 per barrel. According to Axios, negotiations on reopening the crucial Strait of Hormuz have stalled, and on Thursday, US President Trump will receive a briefing from Admiral Brad Cooper, head of US Central Command, on new potential military strike options against Iran. According to sources, US Central Command has submitted a request for troop deployment, planning to move the "Dark Eagle" long-range hypersonic missile currently under development by the Army to the Middle East for potential strikes on deep targets inside Iran. If approved, this would be the first actual deployment of hypersonic missiles by the US. This project has faced long delays and has yet to announce full operational capability. The US and Iran's blockade of the Strait of Hormuz has reduced daily traffic to nearly zero. The International Energy Agency has stated that the geopolitical conflict surrounding Iran's Strait of Hormuz represents the largest energy supply disruption in history, with commodity trading behemoth Vitol Group recently stating that the market is facing a loss of approximately one billion barrels. Brent crude oil futures prices have soared over 60% since the start of the Iran war at the end of February, hovering around $110 per barrel and appearing to stabilize. This suggests that high oil prices may pose a sustained major threat, one that investors, global central bank policymakers, and corporate leaders must confront as a potentially long-lasting reality. Barclays recently warned that the market should not be overly optimistic about temporary ceasefire progress, as the US and Iran have yet to reach a true peace agreement, and the extension of the ceasefire has not led to any substantial recovery in the transportation of oil and natural gas through the Strait of Hormuz. Barclays emphasized that the disruption in oil and gas transportation through the Strait of Hormuz continues to harm the global energy market, and the trends in stock and futures markets have not fully reflected this impact, with pricing for the scale of the supply disruption falling far short. What will ultimately determine the central trend of oil prices may no longer be just whether the hostilities cease, but rather the "post-war repricing" of the entire energy chain, including shipping insurance, tanker capacity, refinery repair, and inventory restocking, all closely linked to the shipping status of the Strait of Hormuz. Apart from Kuwait, countries like Iraq, Qatar, the United Arab Emirates, and Saudi Arabia have all been affected to varying degrees by the closure of the Strait of Hormuz, leading to stockpiling, port disruption, and damage to energy facilities. Analysts from the international financial giant Macquarie stated in a report that if the geopolitical conflict in the Middle East continues into the end of the second quarter, oil prices could rise to $200 per barrel. The ways in which stagflation risks are forming in various core markets are as follows: Keep a close eye on oil prices Oil trading prices remain one of the most crucial barometers for the global economy. Brent crude oil futures prices surged to over $125 per barrel, more than 60% higher than pre-war levels, and continue to rise as the war drags on. High energy prices will inevitably threaten economic growth by squeezing consumers and businesses, while significantly pushing up inflation. Citigroup, a Wall Street financial giant, stated that it is considering a rather bleak extreme scenario: a long-term average price of $120 per barrel for Brent crude by the end of the year, which could lower global economic growth to between 1.5% and 2%, with overall inflation approaching 5%. Natural gas futures trading prices in Europe and Asia surged by over 80% at one point. Farmers are facing the second round of soaring fertilizer prices in four years, and some countries, including Sweden, have warned of possible long-term shortages of aviation fuel. The chart above compiles a line graph of "Oil Tanker Traffic Through the Strait of Hormuz." Financial conditions Although borrowing costs tied to the yield of 10-year government bonds have risen significantly, this impact has not yet been clearly reflected in the overall financial environment and financial conditions. According to a closely watched Goldman Sachs index that tracks how asset prices affect funding availability and future growth, a key indicator in the market, the US tightened to its most restrictive level since last spring in March, but has since stabilized significantly, mainly supported by the global stock market rebound since April. Financial conditions in the eurozone and Japan have seen moderate tightening, primarily driven by rising borrowing costs. The UK, on the other hand, has experienced a more pronounced tightening of financial conditions, indicating a heavier impact on economic growth. The chart above shows how financial conditions based on market trends have evolved in the eurozone, UK, and the US since the start of the Iran war. The US economy may face more inflationary pressures ahead The impact varies across regions due to different exposures to the flow of energy through the Strait of Hormuz. In the US, where oil exports are among the largest globally, gasoline prices are still slightly below pre-war levels. Mohit Kumar, Chief European Economist at Jefferies, stated that the scale and nature of stagflationary shocks vary in different regions. "In the US, inflation will still be higher, but that is due to the rise in international oil prices rather than the impact of energy supply disruptions; the impact on growth will be much smaller in the US than in Europe." US business activity rebounded in April, despite a surge in output prices. Consumer expectations for inflation in the next year rose significantly from 3.8% in March to 4.7% this month, and market-based indicators have also risen. Jamie Dimon, CEO of JPMorgan Chase, stated this week that the worst stagflation scenario still exists for the US economy. The chart above compiles a line graph of "US Consumer Inflation Expectations." Difficult situation in Europe Europe's reliance on energy imports makes it particularly vulnerable, with data pointing to macroeconomic shocks resembling stagflation. A key data released on Thursday is expected to show that inflation in the eurozone is approaching 3%. Contraction in business activity, tightening of bank loan standards, and soaring inflation expectations all suggest that Europe's economy is facing an increasing risk of stagflation or even recession. The IMK Economic Research Institute in Germany believes that the probability of the eurozone's largest economy entering a recession in the second quarter is 34%, up from 12% in March. Carsten Brzeski, Global Head of Macro at ING, stated that if the Strait of Hormuz is disrupted for another month, it could trigger a technical economic recession in the eurozone. While business activity in the UK has performed relatively well so far, risks are on the rise. The International Monetary Fund has made the largest downward revision in economic growth among advanced economies for the UK. Reflecting investors' serious concerns about inflation, as traders bet on higher benchmark rates in the UK and eurozone due to expectations of more hawkish interest rate policies in Europe, there has been a faster rise in lending costs in European markets than in other regions. Since the start of the Iran war, the yield on UK two-year government bonds has risen by 90 basis points. Stock markets may be more focused on the macroeconomic background and future growth prospects, with the eurozone stock market declining by 4%, the UK stock market by 5%, while the US and South Korean stock markets have significantly risen together. The chart above shows that, following the shock of the Iran war on the European economy, the cost of business investment is rising, leading to a contraction in market business and trading activities. Asia suffering widespread damage Asia, which typically receives about 80% of Gulf oil exports and 90% of liquefied natural gas shipments, is bearing the brunt of the impact. Some regions in South Asia and Southeast Asia are already facing energy shortages. Foreign investors are pulling out of Thailand on a large scale, and the Philippines is one of the countries most severely affected by high oil prices and energy supply shortages. Indian businesses may face sustained pressure on energy and power system supplies. The chart above shows the proportions of oil and natural gas imports from the Middle East for major Asian economies. In other regions, the Bank of Japan has significantly raised its inflation forecasts, indicating its readiness to announce a restart of rate hikes at its monetary policy meeting in June. The Chinese market is a significant exception. With ample oil reserves and a diversified energy structure, the Chinese economy expanded sharply by 5% in the first quarter. International investors are bullish on Chinese companies in the battery and electric car sectors, as well as renewable energy companies like CECEP Solar Energy that operate efficiently in China. Relatively low inflation also helps Chinese bond assets rise when other markets fall. The Strait of Hormuz is crucial for everything The risk of stagflation is clearly making a comeback, but it is not a uniform impact on the global economy. It presents a pattern of differentiation, with "energy-importing economies resembling stagflation, the US facing inflation escalation pressure, and China relatively buffered." Currently, the most crucial macro variable is the international oil price trend closely tied to the sailing status of the Strait of Hormuz. As the Iran war enters its third month, the continued closure of the Strait of Hormuz is prolonging the largest energy supply disruption in global history; at the same time, the latest oil price reports show Brent climbing beyond $120 and hitting highs since 2022. High oil prices will simultaneously reduce real income, squeeze business profit margins, push up transport/fertilizer/aviation fuel costs, and elevate inflation expectations, which is a typical stagflation transmission chain. From a regional perspective, Europe, the UK, and certain Asian countries are at the highest risk. Europe relies on energy imports, and with contraction in business activity, tightening bank loan standards, and rising inflation expectations, the IMK has raised the probability of Germany entering an economic recession in the second quarter from 12% to 34%; the European financial institution ING also believes that if the Strait of Hormuz remains closed for another month, the eurozone economy may at least enter a technical economic recession. Asia generally absorbs about 80% of Gulf oil exports and 90% of liquefied natural gas shipments, making South Asia, Southeast Asia, and Japan more vulnerable to input inflation, fuel shortages, and capital outflows. In contrast, the US has greater energy self-sufficiency, and gasoline prices are still slightly below pre-war levels, indicating a smaller impact on growth. However, US consumer expectations for inflation in the next year have jumped from 3.8% to 4.7%, indicating a more "resurgent inflation" issue. Global investors fear not just a sudden rise in oil prices, but a prolonged period of high oil prices that forces central banks to refrain from rate cuts, squeezes business profit margins, erodes consumer demand, and ultimately leads to a triple squeeze of "high inflation + low growth + high interest rates." The narrative of the AI capital expenditure-driven "AI computing industry chain macro growth" continues to support risk appetite in global stock markets, but the energy shock is becoming the biggest macro pressure test on this AI super bull market; if Brent oil prices remain above $110120 for an extended period, the market will have to reassess the risks of European/Asian recession, more hawkish central bank reaction functions, and an upward revaluation of global equity discount rates. It is important to note that bond prices, energy prices, and European financial assets have begun to reflect a more severe combination: the longer oil prices remain near historic highs, the harder it is for central banks to cut rates, making it easier for the economy to be consumed by high costs. This round of the AI-driven global stock market super bull market will also face higher discount rates and profit margin pressures if Brent oil remains sustained at levels above $110120. Truthy of AI capital expenditure-driven "AI computing industry chain macro growth" continues to support risk appetite in global stock markets, but the energy shock is becoming the biggest macro pressure test on this AI super bull market; if Brent oil prices remain above $110120 for an extended period, the market will have to reassess the risks of European/Asian recession, more hawkish central bank reaction functions, and an upward revaluation of global equity discount rates.