Hormuz crisis sends oil higher, raises global inflation fears

March 08, 2026 (MLN): The escalation of conflict involving Iran has triggered significant volatility in global energy markets after military strikes and retaliatory actions effectively disrupted shipping through the Strait of Hormuz, one of the world’s most critical energy chokepoints.

The waterway typically handles nearly one-fifth of global oil supply and roughly 20% of liquefied natural gas (LNG) trade, making any disruption a major shock to global energy markets.

Following the escalation, oil prices surged past $85 per barrel, rising sharply from the pre-war range of $65–70, while LNG prices climbed to around €51/MWh from €30–35/MWh, reflecting mounting concerns over supply disruptions and global energy security.

Economists note that the initial price reaction has been significant but still below the potential levels implied by a prolonged disruption.

Energy demand and supply are highly inelastic in the short term, meaning consumers cannot easily reduce usage and producers cannot quickly ramp up output.

Academic estimates suggest that every 1% decline in global oil supply can push prices higher by 3–8%, implying that a severe supply shock could drive oil prices as high as $120 per barrel if the disruption continues.

The fact that prices have not yet reached those levels suggests that markets are currently pricing in a temporary disturbance rather than a long-term blockade.

In the base-case outlook, the disruption is expected to be short-lived, with shipping through the Strait of Hormuz potentially resuming by the end of March.

Under this scenario, oil prices may remain elevated near current levels through the near term before easing back toward pre-conflict levels by the third quarter of 2026.

Inflation would experience only a modest bump around 0.3% points in the Eurozone while economic growth would face only minor downgrades. Overall economic activity would largely normalize by mid-year, according to analysis from Berenberg.

However, the adverse scenario presents a far more disruptive outcome. If the strait remains blocked for several months, oil prices could spike toward $120 per barrel while LNG prices could approach €90/MWh during the summer months.

Such a prolonged supply shock could trigger renewed stagflation risks in Europe, where economies remain highly dependent on imported energy.

Inflation could climb toward 4%, while economic growth could weaken sharply, leaving policymakers in a difficult position between controlling inflation and supporting growth.

These projections and risks are highlighted in the latest economic outlook published by Berenberg Bank.

The Eurozone would likely be among the regions most vulnerable to a prolonged disruption. In the benign scenario, economic growth would slow modestly from 1.3% to around 1.1%, with inflation rising slightly to about 2.1%.

However, under the prolonged disruption scenario, growth could drop to around 0.7% while inflation accelerates toward 4%, placing the European Central Bank in a classic policy dilemma where high inflation limits the ability to cut interest rates despite weakening economic activity.

In the United Kingdom, the conflict could delay the anticipated easing cycle of monetary policy.

Rising fuel costs would feed into inflation relatively quickly, while household energy bills would increase later due to the lagged pricing mechanism of the Office of Gas and Electricity Markets price cap system.

In a prolonged disruption scenario, inflation could remain around 3% throughout 2026, forcing the Bank of England to postpone rate cuts until much later than previously expected, potentially delaying meaningful economic recovery until 2028.

The United States, by contrast, is relatively better positioned due to its status as a net energy exporter. The direct growth impact is expected to remain limited, though inflation risks could increase if higher energy prices persist.

Rising energy costs combined with tight labour markets and fiscal stimulus could push inflation toward 4%, complicating the policy outlook for the Federal Reserve, which may face pressure between maintaining price stability and avoiding further economic tightening.

Currency markets have already begun reacting to the geopolitical shock, with the US dollar strengthening as investors seek safe-haven assets.

The euro and pound have weakened slightly as Europe’s greater energy vulnerability becomes evident.

In the near term, the EUR/USD exchange rate is expected to soften modestly toward 1.19, compared with earlier forecasts of 1.21.

However, the longer-term outlook still points to a weaker dollar once geopolitical tensions ease, according to projections from Berenberg Bank.

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