Near-term energy supply shock unavoidable

Gathering economic and political forces could limit disruption

The Mideast conflict has effectively closed the Strait of Hormuz – a world energy chokepoint – and is rippling out across markets and supply chains. We think this is a visible global macro shock no matter the endgame, with higher inflation and bond yields. Yet if the closure drags on, we think a feedback loop could emerge: The conflict drives prices, but the political and economic fallout could limit the conflict. We prefer U.S. stocks and see classic portfolio diversifiers as challenged.

The flow of energy and goods through the Strait of Hormuz – the conduit for a fifth of the world’s oil and liquefied natural gas (LNG) – is key for how this feedback loop plays out. A record release of about 400 million reserve barrels by the International Energy Agency gave limited relief to oil prices. Yet the conflict drives more than just energy prices. The supply chain shock ups production costs, hurting growth. It also exacerbates pre-existing inflationary pressures and pushes up yields – making it harder for investors and central banks to ignore those pressures.

The longer supply is disrupted, the greater the global macro impact. That’s why we monitor directly for any signs of shipping activity (see the chart below). A tool from our Fundamental Equities team tracks observable and “shadow” traffic – ships with their transponders off. As of Sunday, weekly voyages are around 7% of their previous 12-month average.

We see the impacts of conflict-driven energy price spikes playing out very differently across different regions.

A key difference in oil and LNG makes North Asia particularly vulnerable, we think. Oil can be re-routed, but LNG is tied to regional infrastructure – and North Asia relies on strait imports for both. Our analysis shows that Japan, for example, gets about 70%-90% of its oil and about 10%-15% of its LNG via the strait.

Some Asian countries are stockpiling – a move that shrinks supply and may amplify volatility. Europe is also exposed, with the supply shock from a months-long strait closure potentially twice that in the U.S. Only about 4%-8% of the U.S.’s oil comes from the strait – far less than major economies like France, Italy and Germany (roughly 20%-45%). We see this reflected in performance: Equities in Europe and Asia have fallen more than the U.S.

Energy infrastructure in focus

But here the other part of the feedback loop kicks in: Knock-on effects like this create economic and political pressures for de-escalation. We saw this play out in one day last Monday. Oil experienced its sharpest intraday swing on record after U.S. President Donald Trump said the war could end “very soon.”

Brent crude oil has since surged back around $100 as Iran’s strikes on energy shipping and facilities intensified. Limiting strait shipping gives Iran leverage but hurts them economically – an incentive to end the conflict. Growing frustration with higher gas prices in the U.S. could also act as an incentive. If current crude oil prices persist for six months, we see a notable drag on global growth and boost to inflation.

There are few places to hide from this near-term supply shock in our view. Government bonds and gold are not providing ballast as equities fall. That’s because – as we’ve long said – investors are demanding more compensation for the risk of holding long-term bonds given persistent inflation and high debt levels. This latest supply shock only intensifies that dynamic, flipping the recent market narrative on disinflation and putting more upward pressure on bond yields.

Yet over a six to 12-month horizon, we think risk assets could recover if an endgame emerges. We still prefer U.S. equities on the AI theme. We also like emerging market hard currency debt, where indexes lean towards commodity exporters like Brazil.

Our bottom line

What matters is the duration of the conflict – and the knock-on impact to supply chains. Our tactical views hinge on the strait reopening in a few weeks due to economic and political pressures, even if we see a near-term deterioration.

Jean Boivin is Managing Director, Head of the BlackRock Investment Institute at BlackRock Inc.

Wei Li, Global Chief Investment Strategist, Blackrock Investment Institute at BlackRock Inc., Paolo Puggioni, Head – Fundamental Equities Data Analytics, BlackRock, and Ehsan Khoman, Economist – BlackRock Investment Institute, contributed to this article.

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