Oil prices may need to rise significantly further to stabilize global markets as disruptions in the Strait of Hormuz deepen, JPMorgan said. For import-dependent Europe, the risk of slower growth and higher inflation is rising by the day.
JPMorgan frames the dynamic in blunt terms. “It’s simple math,” the firm’s commodities wrote in an internal note that gained wide attention among investors in recent days. Oil demand does not come down easily in the short term. Demand is structurally inelastic in the short term, with transport and industrial activity slow to adjust. So when supply falls, prices must rise enough to force consumption lower, the bank argues. That hasn’t happened yet.
Brent crude on Tuesday was trading above 110 dollars per barrel after briefly exceeding 120 dollars in March. JPMorgan argues that current price levels remain insufficient to curb demand. The firm believes prices may need to rise significantly further. If the Strait remains effectively shut, oil should naturally climb toward 150 dollars a barrel, the analysts said.
That poses a growing problem for the European economy and its largest listed companies, but investors have yet to fully price it in, said Mark Dowding, chief investment officer at BlueBay, who has been quantifying the economic impact of the U.S.-Iran war.
“As long as supply chain disruptions persist and the damage continues to build week after week, it is only a matter of time before markets begin to reflect it,” he said. “The recent rally in European equities and credit markets sits uneasily with the economic reality.”
‘Shock absorbers failing’
JPMorgan argues that the usual shock absorbers in the oil market are failing. Most of the world’s spare capacity sits in Saudi Arabia and the United Arab Emirates, both of which are constrained. At the same time, inventories are being depleted at a rapid pace. Global supply disruptions have reached close to 14 million barrels a day, while inventory draws in April alone exceeded 7 million barrels a day, with some estimates higher once less visible stockpiles are included.
Even so, the market is not yet balanced. A shortfall of roughly 2 million barrels a day remains, which can only be closed through lower demand. So far, the adjustment has been concentrated in emerging markets, where higher energy costs quickly feed through to consumption. For the market to fully rebalance, developed economies will also need to reduce demand, likely requiring higher prices still.
“Should transit of the Strait remain at a standstill, we would be inclined to subtract 0.1 percent from European GDP and add a further 0.1 percent to inflation, for every additional week that we are stuck with this impasse.”
Mark Dowding, Bluebay
At the same time, the last tankers from the Gulf, loaded before the conflict, have now arrived in Asia. From this point on, shortages are expected to emerge more quickly.
U.S. President Donald Trump, however, appears in no rush to resolve the standoff. Iran has floated a proposal to reopen the Strait of Hormuz in exchange for lifting the U.S. blockade and pausing the conflict, but the offer sidesteps the nuclear dispute that triggered the war and is unlikely to be accepted.
Even in a scenario where the Strait reopens relatively quickly, Dowding expects growth in the eurozone to remain below 0.5 percent, while inflation rises above 3 percent. “If the disruption persists, the likelihood of a recession will increase further,” he said.
“Should transit of the Strait remain at a standstill, we would be inclined to subtract 0.1 percent from European GDP and add a further 0.1 percent to inflation, for every additional week that we are stuck with this impasse,” he said.
From price spike to broader disruption
The impact is already starting to show up in European data. Germany’s Ifo index, the country’s most closely watched leading indicator, fell to 84.4 in April, its lowest level since the pandemic. The survey, which tracks business expectations and current conditions, is a key gauge of economic momentum and points to a renewed slowdown in Europe’s largest economy. According to Carsten Brzeski, global head of macro at ING research, the shock is shifting from a pure energy price spike to a broader supply and supply-chain disruption, hitting industrial activity and confidence.
Chris Turner, global head of markets at ING, said the oil shock is increasingly taking on a stagflationary character, complicating the European Central Bank’s response as growth weakens while inflation expectations remain elevated. The ECB has paused rate hikes for now, but has signaled that further tightening remains on the table, with its next policy decision due on Thursday.