Banks weigh oil shock from U.S.-Iran conflict

Oil prices have risen sharply and global stock markets have come under pressure as the U.S.-Iran conflict escalates. The Strait of Hormuz, which handles roughly 20% of the world’s oil flows, has effectively stalled as threats of attacks deter vessels from transiting the key chokepoint.

Brent crude has surged between about 7% and 13% in recent sessions, with prices briefly moving above $82 per barrel and trading near $95 per barrel in some measures. The resulting energy shock has triggered a flight to safety, with gold prices up around 2% while major European equity indexes have fallen more than 2% on average and U.S. index futures have dropped more than 1%.

Analysts attribute part of the spike to non-fundamental drivers such as hoarding and a sharp increase in insurance costs for tankers using the Strait of Hormuz, where premiums have reportedly jumped by 25% to 100%.

Bank of America (BAC) argues that, despite market volatility, the baseline outlook for the U.S. economy has not materially changed. In a note cited by Investing.com, BofA analyst Meghan Swiber said U.S. macro risks are likely limited unless there is a pronounced spike in oil prices.

Swiber indicated that the main near term impact for the United States would be on the timing of Federal Reserve interest rate cuts and on the U.S. dollar, rather than on the continuation of the economic expansion itself. The bank highlights substantial domestic energy production and Saudi Arabia’s spare capacity as factors that could buffer the shock if the conflict does not escalate further.

Bank of America (BAC) identifies oil as the primary transmission channel through which the Middle East conflict affects the U.S. economy. Its rule of thumb suggests that a $10 increase in crude adds roughly 0.1 percentage point to personal consumption expenditures inflation and subtracts a similar amount from GDP growth, a hit that is seen as manageable at current price levels.

Deutsche Bank (DBKd) warns that the same energy shock could disrupt the UK’s progress toward the Bank of England’s 2% inflation target. The bank estimates that the effective closure of the Strait of Hormuz could push UK headline inflation back toward 3% by the end of 2026.

With Bloomberg Brent crude trading near $95 a barrel, Deutsche Bank’s (DBKd) modelling suggests a sustained 10% oil price rise typically adds about 0.2 to 0.3 percentage points to UK headline inflation over six to twelve months. Higher wholesale energy costs risk lifting domestic utility bills, transport prices and goods inflation, potentially offsetting recent cooling in services.

The analysts say this “stagflationary” shock could dampen UK GDP by about 0.4% in 2026 if elevated energy prices persist. Market pricing now reflects a greater chance that the BoE will keep interest rates restrictive well into 2027 to prevent second round wage effects, even as the FTSE 100 (UKX) trades lower and policymakers weigh weaker growth.

Macquarie describes the U.S.-Iran war as a significant negative supply shock, warning of an emerging “inflationary shock” as energy prices surge. The bank notes that supply driven oil spikes have historically led to sharp and persistent employment losses in major oil importing economies such as Japan, China and many European countries.

India is flagged as particularly exposed because it sources about 85% of its imported oil from the Persian Gulf region. By contrast, countries with large reserves and export capacity, including Brazil, Canada and Norway, are seen as positioned for relatively robust output despite the inflation pressures.

Macquarie cautions that even the U.S. could face a severe though potentially short GDP decline if high oil prices interact with existing financial fragilities like private credit leverage and weak household sentiment. The bank adds that war driven inflation may prompt a more hawkish Federal Reserve stance, while the longer term path of the U.S. dollar will depend on how the conflict and U.S. leadership are perceived.