In Summary
- The ongoing oil-price shock shouldn’t prove structural, with flows likely to normalize in 2027. But several pressure points are pulling oil and gas prices in different directions and the balance will decide where prices go next. Brent jumped to nearly 110 USD/bbl after Saudi Arabia was forced to shut its East-West pipeline, pushing the net hit to Hormuz flows to about 4.3mbpd vs pre-war levels. For now, pressures points (including near historic lows strategic reserves and an underinvested refining base) are outweighing the two relief valves (shadow traffic in Hormuz and demand destruction). As we expect the Saudi pipeline to be repaired rather swiftly and volumes steady in Hormuz, Brent should average 87 USD/bbl in Q4 2026 before consolidating to 76 USD/bbl in 2027. But prices would hold near 100 USD/bbl if the outage extends toward six weeks and Hormuz remains in flux.
- European gas prices are climbing as the region races to refill, though the resulting macro risk looks contained for now. Gas prices have rallied from the mid-40 EUR/MWh in July to over 80 EUR/MWh as Hormuz LNG loadings stay stuck at 15-25% of pre-war levels. We expect TTF averaging 65 EUR/MWh in Q4 2026 before easing to 36 EUR/MWh in 2027 amid larger supply from both the US and the Middle East. A sustained move above 120 EUR/MWh for six months would risk tipping the Eurozone into recession.
- A separate refining and export bottleneck is keeping refined product prices elevated. US and European crack spreads have surged to 62 EUR/bbl and 74 EUR/bbl. On top of Hormuz disruptions, a significant share of Russia’s refining capacity has been hit by Ukrainian strikes, resulting in a diesel export ban. Until June, China also had export restrictions in place amid fears of supply shortages. A structurally underinvested refining base is adding to the multi-layered crisis. As a result, global oil demand is expected to contract 2.5mbpd in 2026 as demand from Asia has collapsed.
- Diesel-reliant transport and agriculture, Asian petrochemicals and fertilizers are the most exposed sectors with very few short-term substitutes available, while producers with domestic feedstock flexibility are comparatively insulated. Between March and August, fossil-fuel importers paid an estimated extra USD330bn. High diesel prices are hitting trucking, agriculture and construction, and the Gulf’s 40% share of global sulfur exports is impacting food production via fertilizers. The near-term adjustment is mainly through inventory drawdowns and output cuts rather than genuine substitution.
- Households are only starting to feel the full inflationary hit, and the pass-through will remain sticky into 2027. In the US, gasoline alone drove over a third of August’s CPI increase, with pump prices set to reach 3.84 USD/gallon in 2026 (+24% y/y, about 355 USD more per household annually). In Europe, regulated tariffs are catching up with a lag and lower-income households remain disproportionately exposed.
- Bonds are already pricing in most of the energy premium, but sustained inflation and oil-price spikes could lead to further rate stress. Much of the initial repricing has already occurred, we estimate that a further increase in Brent to 120 USD/bbl would only lift yields by 5-10bps (vs 17-18bps on inflation swaps and 8-11bps on expected policy-rate pricing). This suggests that a significant further rise in yields would likely require a renewed large supply shock or evidence that inflation is delaying monetary-policy normalization.
- Looking ahead, over the longer run, the unfolding events are fundamentally a Hormuz/Gulf shock that will reshape the global energy. The conflict is reshaping global energy trade routes: Gulf states are building out bypass infrastructure (ADCOP, the Kirkuk-Ceyhan/Development Road corridor, Duqm) while China, India, Japan and South Korea diversify away from Gulf-transiting barrels; LNG has no equivalent bypass, so gas exposure remains structural.