Oil Prices After the Strait of Hormuz Closure
With the Strait of Hormuz now assumed closed until at least mid-April, commodity strategists have revised their Brent crude forecasts significantly higher and pushed out the timeline for any meaningful price decline. The peak in oil prices has been delayed, the subsequent decline will be slower because strategic reserves need refilling, and the risks are heavily skewed toward worse outcomes. We think investors need to understand the three distinct scenarios in play, the inflation and GDP impacts of each, the historical parallels that offer some comfort, and why the bond market may have already overshot in its reaction.
Published 23 March 2026. Analysis based on institutional research available at time of writing.
Three Scenarios for Brent Crude
Institutional research from leading commodity desks has coalesced around three broad scenarios for oil prices. Each has very different implications for inflation, growth, and central bank policy, and the probability distribution is not symmetric. The tail risks are skewed to the upside for prices.
The baseline scenario assumes the Strait reopens around mid-April and commercial traffic gradually normalises over the following weeks. Under this path, Brent peaks near current elevated levels and then declines toward approximately $80 per barrel. The decline is slower than it would have been pre-conflict for a specific reason. Strategic petroleum reserves in the US, Europe, Japan, South Korea, and other major economies have been drawn down to cushion the disruption, and those reserves need to be refilled. The refilling process adds sustained demand to the market even after supply normalises, which keeps prices elevated for longer than a simple supply-off, supply-on analysis would suggest. This is the most benign outcome, but it still involves several months of elevated energy costs flowing through to consumers and businesses.
The adverse scenario assumes the conflict drags on through the second quarter, with intermittent disruptions, continued security risks for commercial shipping in the Strait, and no clean resolution in sight. Under this path, Brent trades in a range of $100 to $120 per barrel for an extended period. Insurance costs for tankers transiting the area remain elevated even when the Strait is technically open, which effectively raises the landed cost of oil for importers. This scenario is enough to cause real economic damage, particularly in energy-importing economies in Europe and Asia, and would likely trigger demand destruction in the most price-sensitive markets.
The severely adverse scenario involves infrastructure damage to Iranian and potentially Gulf state oil production and export facilities that reduces production capacity for years, not months. Under this path, Brent spikes above $140 per barrel and remains elevated well into 2027. This is the tail risk that markets are not fully pricing. The distinction from the adverse scenario is important. In the adverse case, the disruption is about transit and security. In the severely adverse case, it is about physical destruction of capacity that takes years to rebuild. The investment implications of the two scenarios are very different, and portfolios need to account for the possibility of the latter even if it is not the base case.
Headline Inflation Impact by Region
Higher energy prices feed through to headline inflation in ways that vary significantly by geography, energy mix, and the degree to which countries rely on imported versus domestically produced energy.
At the global level, higher oil prices are expected to add the following to headline inflation over the next twelve months.
- Baseline scenario. Plus 0.8 percentage points
- Adverse scenario. Plus approximately 1.2 to 1.5 percentage points
- Severely adverse scenario. Plus a full 2 percentage points
The distribution across regions is highly uneven. Europe faces the largest headline inflation impact because of its reliance on imported natural gas for both home heating and electricity generation. The oil price shock raises transport and industrial costs directly, while the correlated increase in European natural gas prices (TTF) hits household energy bills through a second channel. European headline inflation could exceed 4 percent in the severely adverse scenario, which would force the ECB into an extremely difficult position on rate policy.
China sees the smallest headline inflation impact among major economies. This is because China’s energy mix is more heavily weighted toward domestically produced coal for electricity generation, and its transportation sector is further along in the shift toward electric vehicles, which reduces the direct impact of oil price increases on consumer transport costs. China’s overall energy import dependence for oil is still significant, but the inflation passthrough is dampened by these structural factors.
The US, Japan, Canada, India, Australia, and New Zealand all fall somewhere in between, with the specific impact depending on the share of energy in consumer price baskets, the degree of domestic production, and the extent to which regulated utility pricing dampens or delays the passthrough of wholesale energy costs to retail consumers.
Core Inflation and Why History Offers Some Comfort
Core inflation, which strips out food and energy, is affected through second-round effects as energy costs flow through to transport, manufacturing inputs, and services. The core impact is smaller but still meaningful.
- Baseline scenario adds approximately 0.2 percentage points to global core inflation
- Adverse scenario adds approximately 0.3 to 0.4 percentage points
- Severely adverse scenario adds approximately 0.5 percentage points
Historical parallels offer some reassurance here. The supply disruptions of 1990-91 during the Gulf War, the 2000 oil price spike, and the 2011 Arab Spring disruptions all remained largely confined to headline inflation measures and did not trigger persistent wage-price spirals. The core inflation impacts in each of those episodes were temporary and modest.
There are two reasons to think the same pattern will hold in 2026. First, the current disruptions are concentrated in Middle Eastern energy supply, which is a relative price shock rather than the kind of broad-based supply chain disruption that characterised 2021-22. In 2021, supply constraints hit everything simultaneously, from semiconductors to shipping containers to raw materials, which is why the inflation proved more persistent. A concentrated energy shock is more likely to remain contained. Second, global demand growth is moderate rather than running hot. In 2021, massive fiscal and monetary stimulus was driving demand at the same time supply was constrained, which created the conditions for persistent inflation. Neither of those demand-side conditions exists today.
The caveat is that the starting point for inflation in 2026 is higher than in several of those historical episodes, which limits how much comfort history alone can provide. If inflation expectations become unanchored, the risk of second-round effects increases regardless of the underlying cause.
GDP Impact and the Countries That Get Hit Hardest
The GDP impact is where the real economic pain shows up. Higher energy prices act as a tax on consumers and businesses in energy-importing countries, reducing spending power and compressing margins. At the same time, energy-exporting countries see a positive terms-of-trade shock that partially offsets the global drag.
At the global level, excluding the Middle East itself, the growth drag ranges from 0.4 percentage points in the baseline to 1.2 percentage points in the severely adverse scenario. But the distribution is highly uneven.
- Europe and India are hit hardest. Both are major energy importers with limited domestic production capacity. For these economies, elevated oil and gas prices simultaneously raise consumer costs, compress industrial margins, increase utility bills, and tighten financial conditions. The effect is compounded by the fact that both regions were already facing soft growth before the conflict began.
- Japan and South Korea face similar headwinds as near-total energy importers, though their more efficient industrial bases and higher value-added manufacturing provide some cushion through the ability to pass on costs.
- The US is in an unusual position as a major domestic energy producer. Higher oil prices provide a positive terms-of-trade shock through the shale sector that partially offsets the demand-side drag. Net of this offset, the US economy still takes a hit from tighter financial conditions and weaker global demand, but the impact is more contained than in pure importing economies.
- Canada and Latin American energy exporters actually see a positive GDP impact from higher oil prices, as the boost to their energy sectors more than offsets the drag on their consumers. This divergence creates opportunities for geographic diversification in portfolios.
An important structural point is that the oil intensity of GDP has declined significantly in recent decades, particularly in the US where the rise of shale production and the shift toward a more service-oriented economy have reduced the sensitivity of overall growth to oil price movements. A dollar increase in the oil price today produces a smaller GDP impact than the same increase would have caused in 1990 or 2000. This is genuine structural progress, but it does not eliminate the impact, especially at the magnitudes being discussed in the adverse and severely adverse scenarios.
The US Picture in Detail
For the US specifically, the timing of this conflict creates a challenging convergence of headwinds. The fiscal boost that had been supporting growth through 2025 and early 2026 is fading in the second half of the year. Middle-class tax cuts and full expensing provisions for manufacturing investment are winding down, removing a tailwind that had been keeping consumer spending and business investment growing above trend.
Layering an energy shock on top of fiscal drag leaves US GDP growth expected to run between just 1.25 and 1.75 percent annualised in the second half of 2026. For context, potential GDP growth in the US is estimated at 2.3 percent, so even the upper end of this range represents below-potential growth. The economy would still be expanding, but at a pace that typically involves rising unemployment, weakening corporate earnings, and deteriorating credit conditions.
Financial conditions have tightened by approximately 60 basis points since the conflict began. This tightening has come through multiple channels: higher energy costs, wider credit spreads, a stronger US dollar from safe-haven flows, and weaker equity prices. If sustained, this 60 basis point tightening is estimated to weigh on second-half growth by roughly 0.5 percentage points, which accounts for a significant portion of the expected growth downgrade.
The Bond Market Has Overshot
The bond market reaction has been dramatic and, in our view, has swung too far in the hawkish direction.
On February 27, before the conflict, markets were pricing roughly 60 basis points of Fed rate cuts for 2026. By March 20, that had swung to pricing 5 to 10 basis points of rate hikes. This is a swing of roughly 70 basis points in three weeks, driven by the view that the inflation shock from the conflict would force the Fed to tighten rather than ease.
We think this pricing is wrong. The baseline expectation from institutional research remains two 25 basis point cuts in September and December 2026, bringing the fed funds rate to the 3.0 to 3.25 percent range. The reasoning is that while the inflation shock delays the timing of cuts, the growth deterioration will ultimately dominate the Fed’s decision-making. Energy-driven inflation is a supply-side relative price shock, and the Fed has historically looked through supply shocks when they are accompanied by deteriorating growth dynamics.
The risks are two-sided but asymmetric. If the conflict resolves quickly and growth holds up, the Fed might indeed delay cuts further than the baseline suggests. But the bigger tail is on the other side. If growth deteriorates into a recession or near-recession, the Fed would likely cut more aggressively, potentially delivering 100 to 150 basis points of easing rather than 50. On a probability-weighted basis, the expected fed funds rate path sits roughly 100 basis points below where the market is currently pricing one year out. That gap is significant enough to represent a genuine opportunity for investors who believe growth risks will dominate inflation fears in the Fed’s reaction function over the next twelve months.
What We Are Watching
The next few weeks are critical for determining which scenario becomes the central case. We are watching several indicators closely.
- The duration and terms of any Strait reopening. Partial reopening with military escorts is very different from full commercial normalisation.
- Infrastructure damage assessments. The distinction between temporarily disrupted production and permanently damaged capacity is the key variable for the medium-term oil price outlook.
- High-frequency economic data for signs of demand destruction, particularly in the most energy-sensitive sectors and geographies.
- Strategic petroleum reserve drawdown rates, which provide a real-time indicator of how much the physical disruption is affecting actual supply to refineries.
- Credit spreads and corporate guidance from companies with significant energy cost exposure, which will provide early signals of the growth impact before it shows up in GDP data.
We continue to favour diversified portfolios with meaningful energy exposure as a hedge, quality companies with pricing power, and a cautious but opportunistic stance on fixed income duration. The key risk for investors is anchoring too strongly to any single scenario when the range of outcomes remains this wide.
If you would like to discuss how global macro trends might affect your portfolio, request a callback or call us on 1300 889 603.
