As oil prices once again surpassed $100 per barrel, the unwavering confidence Wall Street analysts have held since the U.S. and Israel initiated strikes in Iran took another hit. Economists have clung to the hope that President Trump is unlikely to prolong the campaign beyond the end of the month, reasoning the White House will avoid fueling energy price hikes during a midterm election year.
However, market volatility is making it harder for analysts to remain composed. This unease stems from the worsening geopolitical situation: A series of attacks on oil tankers in the Persian Gulf occurred this week, and U.S. Navy assurances of military escorts have yet to materialize. Similarly, attacks on Iran’s neighboring countries continue: Dubai has reported multiple drone strikes, while Kuwait’s airport has also been targeted.
“Investors are increasingly accounting for a more prolonged conflict that causes widespread economic damage,” Deutsche Bank’s Jim Reid told clients this morning. Investor sentiment has not been helped by the latest monthly report from the International Energy Agency (IEA), which stated today that the Middle East conflict is “creating the largest supply disruption in the history of the global oil market.” Iran has reportedly rejected the idea of a ceasefire, while President Trump has maintained there is “virtually nothing left” to target in Iran.
No solid evidence of de-escalation in the region has been confirmed, Reid notes, adding: “This is keeping oil prices high and increasing the risk of a broader stagflationary shock … with each passing day, it becomes more difficult to argue that disruptions to shipping and energy infrastructure will be temporary.”
Stagflation combines high inflation (driven by energy prices), higher unemployment (though the latest Bureau of Labor Statistics report puts the jobless rate at 4.4%, jobs data has remained weak), and stagnant economic growth (Q2 and Q3 GDP figures were relatively strong, but Q525 growth estimates have dropped to 1.4%).
The recent climb above $100 per barrel means “we’re also approaching levels that have historically triggered larger risk-off market moves,” Reid noted. Economists need not look far for examples of what this could entail: Russia’s 2022 invasion of Ukraine sent energy prices soaring. We are not there yet, and the global economy is not simultaneously wrestling with post-pandemic inflation.
However, Reid adds: “Clearly, the longer oil remains at these levels, expectations of a sustained shock will only grow.”
The bar for a recession
Analysts have also been projecting the severity of disruptions needed to push the U.S. economy into a recession.
According to Oxford Economics’ chief global economist Ryan Sweet and director of global macro research Ben May, while a recession is not imminent, it is not impossible. Their modeling shows global oil prices would need to average $140 per barrel for two months to pose a recession risk. The U.S. would also have to face “significant tightening in financial market conditions, heightened supply-chain disruptions, and a continuing decline in collective sentiment”—scenarios that could easily unfold if the Middle East conflict drags on longer than expected and disruptions in the Strait of Hormuz persist.
Sweet and May ran a simulation assuming Brent crude hits $140 per barrel for eight weeks, leading to rising natural gas prices and negative spillover effects reducing global real GDP by around 0.7% by the end of 2026. The results included mild contractions in the Eurozone, U.K., and Japan, while the U.S. edged toward a “temporary standstill” as layoffs lifted the unemployment rate.
“We also considered a less severe scenario where oil prices average around $100 per barrel for two months,” the pair continued. “This would trim a few tenths of a percentage point from global GDP growth via higher inflation, but recessions would be avoided.”
Indeed, Bank of America economist Aditya Bhave argued this week that Wall Street may be misinterpreting signals related to the Middle East. Many investors expect the Fed to pause rate adjustments until energy’s inflationary impact is clear in the data, though Bhave noted: “Policy risks emerge when demand is strong enough for activity to withstand a supply shock,” as seen in 2022. He added: “By contrast, we now have a soft labor market, moderately high inflation, and more modest fiscal support. This positions us for a more dovish Fed response if the oil shock persists.”