The ongoing conflict in West Asia is causing significant economic disruptions, with Bank of America warning of a potential stagflationary shock if the situation persists. The critical factor remains the duration of the conflict, particularly its impact on the Strait of Hormuz, a vital oil transit route.
Bank of America's base case scenario anticipates a resolution that reopens the Strait of Hormuz, but uncertainty remains high. Markets are currently pricing in a quick resolution, a stance that Bank of America's Irigoyen considers dangerously complacent. If the conflict extends through the summer, global oil inventories could be severely strained, leading to non-linear increases in oil prices.
Crude oil prices are unlikely to return to their pre-conflict range of high $60s to low $70s per barrel. Even in an optimistic scenario, Bank of America forecasts a new normal of $90–95 per barrel, driven by the need to replenish inventories across Asia and the time required for Middle Eastern supply chains to normalize. While other producers like the United States are increasing output, the restocking cycle for large importers such as China and Japan will keep prices elevated.
“The permanent impact will depend on how long the war lasts.”
Irigoyen, Bank of America
Countries heavily reliant on imported oil, particularly in Europe, are expected to suffer more than the United States, which benefits from being a net energy exporter. India faces a dual challenge of a widening current account deficit due to rising energy costs and strong investment-led imports, compounded by currency depreciation. However, Irigoyen notes that India's current account stress partly reflects productive investment capacity.
Central banks are in a difficult position. The Federal Reserve is expected to hold rates steady, while the European Central Bank may need to hike rates. The Reserve Bank of India is likely to maintain its current stance in the near term, with potential rate hikes later if energy prices remain high. Irigoyen emphasizes the distinction between core inflation and energy-driven headline inflation, noting that central banks can overlook temporary supply shocks but not persistent second-round effects.
“If the war extends throughout the summer, the pressure on oil prices will be much higher and non-linear — it does not look like that is a story priced in at this point.”
Irigoyen, Bank of America
Emerging markets are experiencing divergent impacts. Latin American economies, which are net energy and commodity exporters, are benefiting from higher prices, unlike oil-importing emerging markets. Meanwhile, U.S. equity markets continue to rise, driven by the AI investment narrative, despite potential downside risks if the conflict prolongs.
Background
The Strait of Hormuz is a strategic chokepoint for global oil shipments, with about 20% of the world's petroleum passing through it. Historically, disruptions in this region have led to significant volatility in oil markets, affecting global economic stability.
The global economy is facing an uncertain future, heavily dependent on the duration of the West Asia conflict. Policymakers and investors must navigate this unpredictable landscape, with the potential for significant economic repercussions if the conflict continues.
