Will ‘Crude Shock’ Result In Stagflation In Global Economy?

The Israel-US conflict with Iran, which has already led to a 23% surge in global crude oil prices, and 47% increase in natural gas prices, now raised concerns over stagflation across the global economy.

Stagflation refers to an economic situation wherein high inflation, stagnant economic growth, and elevated unemployment take place simultaneously.

"A broader pass-through on inflation could hit consumption growth that is the weak link for the global economy raising risks of a stagflation-like environment setting in," according to an ICICI Bank report. Such a scenario is known to trigger acute risk aversion, elevated yields and a strong global USD in the medium term.

Key Forecasts Linked To Middle East Crisis

Supply-linked concerns will keep brent crude prices elevated over "1H2026 trading in the USD 80/bbl to USD 120/bbl range followed by gradual easing in the 2H2026 to the USD 65/bbl to USD 75/bbl range."

All major currencies including EUR, INR, CNY, GBP and JPY are expected to remain vulnerable to elevated crude prices given that each currency belongs to a region that is a net importer of crude.

"We raise our global USD projections higher for 1H2026 reflecting the fact that the US economy is a net exporter of crude and the ongoing safe-haven trade but retain our medium-term bearish profile for 2H2026,' according to ICICI Bank.

If the crisis eases in about a fortnight’s time as ICICI Bank expects the impact on the global economy to be modest. However, global growth profile could be marginally lower and global inflation profile higher.

Why Strait Of Hormuz Remains In Focus

The Middle Eastern region still plays a pivotal role on the production and flow of energy into the global economy. While there have not been any reports of significant damage being made to upstream energy infrastructure in the region yet, the crisis has widened across the region.

A few ships that are not linked to US, EU or Israel have been able to move through, but these remain limited in capacity and scope. With storage filling up, shut-ins in terms of production appear to be taking hold in UAE, Qatar, Kuwait and Saudi Arabia respectively. These set of OPEC countries account for ~20% of total global crude oil production implying that any structural reduction in output could hit demand and supply balances in the physical markets.

Also Read: Oil Heads For Weekly Gains Despite US Sanctions Waiver On Russian Oil

Key Risks Linked To Developments In Strait Of Hormuz

When it comes to supply chain disruptions as a result of Iran blocking tanker transits in the Strait of Hormuz, two sets of risks remain:

• Whether there is a permanent disruption in supply that pushes the crude prices structurally higher or there is just a temporary spike 
• Will the robust global growth outlook get nipped by uncertainty over the conflict as it could weigh heavily on business confidence.

Middle East Crisis Escalation: What Does It Mean For INR, & Energy Imports?

While the oil imports can be diversified to Russia, as the US has offered a 30-days relief for Russian oil purchases, mostly the oil imports could be at a premium too as per media reports. Apart from crude oil, India is also vulnerable to LPG and LNG imports, with ~70-80% imports routed through the Strait of Hormuz, while the strategic reserves are almost nil and available inventories could only last for 2-3 weeks

In terms of currencies, the step up in geo-political concerns have risen the global dollar profile, resulting in a broad-based depreciation across most developed and emerging currencies. The INR also fell by 1.5% against the dollar over the last month, to a new record low of 92.32/dollar reflecting a hit to the current account balances as well as global risk aversion restricting capital flows into the local markets.

On Thursday, March 13 rupee fell by 24 paise to hit an intra-day low of Rs 92.43 against US dollar.