New modelling from Oxford Economics has outlined a trio of adverse oil shock scenarios, with even the most extreme – a temporary closure of the Strait of Hormuz – resulting in only a mild hit to global gross domestic product (GDP). But while the economic fallout may be contained, the inflationary implications are anything but.
In a market note released on Tuesday, Oxford Economics warned that under its Hormuz disruption scenario, Brent crude could surge to US$130 per barrel due to interruptions in key oil supply routes. The resulting shock would likely push US consumer inflation close to 6 per cent, while eurozone inflation could approach 4 per cent – well above the European Central Bank’s target.
"Although the price shock inevitably dampens consumer spending because of the hit to real incomes, the scale of the rise in inflation and concerns about the potential for second-round inflation effects likely scupper any chance of rate cuts in the US or elsewhere this year," said Ben May, director of global macroeconomic research at Oxford Economics.
Under the firm's more moderate scenario – which assumes Israeli attacks on oil infrastructure bring to a halt all exports of oil from Iran – oil prices are forecast to stabilise around US$90 per barrel, with global inflation peaking at 4.5 per cent in early 2026.
“The negative impact of the higher oil price pushes world GDP growth down to 2.3 per cent both this year and next, roughly reversing the recent upward revision to our world GDP forecast from the easing in US–China trade tensions,” said Ben May, director of global macroeconomic research at Oxford Economics.
The US economy, buoyed by its domestic energy production, would likely absorb the shock better than Europe, May predicted, noting that the eurozone – already on shaky ground – could tip towards stagnation by year-end, despite inflation staying lower than in the US.
Under Oxford Economics' baseline scenario, the ongoing conflict between Israel and Iran ends, but Western powers impose tighter sanctions on Tehran, curbing global oil supply by around 1 per cent. In this case, it estimates Brent crude would rise to roughly US$75 a barrel – about US$6 higher than previous forecasts – and would remain elevated through 2026.
“This is unlikely to prompt a change in the probable gradual downward path for policy rates,” May said.
Still, it cautioned, its modelling assumes only direct oil price effects, not broader financial market contagion.
“The hit to activity could prove larger if, for instance, tensions in the Middle East trigger a bigger asset-market sell-off than the model captures,” May said.
The market has already begun to price in heightened geopolitical risks. Last week, crude oil surged as much as 14 per cent intraday – the largest spike since March 2022 – after Israel launched strikes on Iran, before easing back to a gain of around 6 per cent.
“This significant movement reflects growing concerns over Iran’s oil production capacity,” said Anna Rosenberg, head of geopolitics at Amundi Investment Institute, in market commentary.
“Currently, Iran produces approximately 4.7 million barrels per day, and the recent spike in oil prices implies a potential reduction of 2 million barrels per day, which is significant and likely an overreaction by the markets.”
Rosenberg noted that while Amundi’s Brent crude target remains at US$63 by the end of 2025, the growing geopolitical risk premium and volatility could push prices higher if the conflict escalates further.
“We could consider revising our targets once there is clearer visibility on any actual damage to supply capacity, which at this stage appears to be minimal,” she said.
’Look through inflationary impact’
For his part, AMP chief economist Shane Oliver urged central banks, including the RBA, to look through the inflationary impact of higher oil prices, arguing they are more likely to be deflationary in effect by acting as a “tax on spending”.
In a note on Tuesday, Oliver said: “A 10 to 12 cents a litre rise in petrol prices, if sustained, would only add about 0.2 per cent to CPI inflation but the RBA would likely look through this and focus on underlying inflation and also any dampening impact on growth from higher fuel prices.
“Overall, it’s not enough to change our view that the RBA will cut rates again in July and in August and November.”
Oliver added that while higher oil prices flowing from the war could drag on Australian economic growth via weaker global growth, “Australia is relatively well placed because we are a net energy exporter and so may benefit from higher prices for gas exports.”
“And our economy is less dependent on oil,” he reminded.
AMP’s base case scenario assigns a 65 per cent probability to the current conflict between Israel and Iran remaining contained, with limited missile exchanges and no major disruption to global oil supplies.
However, Oliver noted that it may take several weeks for markets to gain confidence in this outcome, during which time oil prices could continue to rise, potentially weighing on share markets in the short term.
In a risk scenario with a 35 per cent probability, Oliver, like analysts at Oxford Economics, warned that an escalation disrupting oil supplies, particularly through the Strait of Hormuz, remains a significant concern.
“This could conceivably result in a doubling in oil prices to around US$150/barrel, which could drive a sharp fall in share markets. Such a disruption is likely to be temporary and would invite an aggressive US response against Iran.”
