Historically, central banks often lean toward more hawkish policy within the first one to three months after an oil crisis, in order to deal with short-term inflation shocks. However, as the impact on economic growth becomes increasingly evident, policy expectations begin to shift, and interest rates typically fall around six to nine months after the crisis, because downside risks to economic activity start to dominate. The current market environment reflects the dynamics of this early stage.

Therefore, for the market, the key issue is not only how high oil prices can rise, but also how long oil prices can stay at elevated levels, and how much impact oil prices will have on the economy. This balance will determine whether the market’s current pricing of a shift toward tighter policy can be sustained, or whether it will ultimately reverse.

As the first observation window for the energy shock appears, will the CPI show that price pressure has fully permeated?
March CPI data is becoming the first round of observations as the Middle East conflict triggers an energy chain reaction. It is expected that March’s overall CPI month-on-month will accelerate to 0.8% (with the year-on-year rate rising to 3.28%), significantly higher than February’s 0.3% month-on-month. If the data meets expectations, the overall inflation rate will set the highest record since mid-2024. By contrast, March’s core inflation rate is expected to reach 0.3% month-on-month (2.7% year-on-year), with growth remaining relatively moderate.

Price-raising pressure is highly concentrated in the energy and food categories. Due to the blockade of the straits, U.S. domestic gasoline prices jumped by more than 30% in March. Although automotive fuel has a low weight in the CPI basket, we estimate that nearly 50% of the momentum behind the current surge in overall inflation will be driven directly by fuel prices. This extreme price transmission is forcing the market to reassess the Federal Reserve’s policy error-tolerance space.

Federal Reserve policymakers have acknowledged that the Middle East conflict has significantly increased the difficulty of balancing monetary policy between growth and prices. In a recent warning, Bullard said that the longer the conflict lasts, the greater the risk of negative shocks to growth prospects. While Williams pointed out that the energy shock has not fundamentally changed the path of core inflation, he also admitted that short-term uncertainty has increased substantially.

In general, the Fed tends to ignore the initial effects of an energy shock. We believe their next focus will be on assessing whether price pressure has permeated the labor market and the services sector, leading to a de-anchoring of inflation expectations. At present, regardless of market-based inflation compensation indicators or consumers’ long-term inflation surveys, they still remain anchored, which provides the Fed with a valuable observation window.

(The above views come from a research report by ANZ Bank on April 7; for reference only)

Shell Q1 update: analyzing the liquidity pain and trading frenzy under a $120 oil price
In its latest trading update released on Wednesday, Shell revealed a severe shock to the performance of global energy majors caused by the U.S.-Iran war. Because in the first quarter Brent crude rose, at one point, to a multi-year high of $120 per barrel after the U.S.-Iran clashes in late February and the straits blockade, Shell is facing a polarizing performance—on one hand, explosive growth in oil trading profits, and on the other, severe pressure on short-term liquidity.

Shell expects its working capital (a key measure of short-term liquidity) to see a massive outflow of $10 billion to $15 billion. This negative swing reflects the sharp impact of unprecedented price volatility on inventory valuations. The Royal Bank of Canada noted that Shell is going through a “monster-level” working capital build-up, which precisely highlights the extremity of the current energy environment. Given Shell’s solid balance sheet, investors tend to “filter out” this short-term liquidity disruption.

Although infrastructure has been damaged, Shell’s chemicals and products business (including its core oil trading division) is expected to perform “significantly better” than the previous quarter. Similarly, the marketing division, which includes its gas station business, is also expected to show strong adjusted earnings. This means that amid worsening energy shortages, Shell’s global distribution and arbitrage capabilities are being converted into astonishing cash flows.

(Analysis comes from a research report published by Reuters analyst Stephanie Kelly on April 8; for reference only)

Strait transit rights are at the core of pricing—oil prices will reach… if the conflict ends and persists
Many scenarios currently unfolding appear broadly consistent with our recent benchmark forecast for crude oil prices and our estimates of a mid-term bull market. If the U.S. ultimately withdraws from the Middle East conflict without reaching an agreement with Iran—especially if it fails to reach an agreement on the Strait transit rights—then based on data of about 20.4 million barrels per day of crude oil and oil products exported from the Middle East in 2025, we estimate that global supply could see a gap of about 4.4 million barrels per day; if some Gulf countries refuse to accept Iran’s so-called transit taxes, this gap could reach 8 million barrels per day. Of course, if all ships can pass through the Strait after paying that tax, then the supply disruption could ultimately be resolved. As we stated in our quarterly report, the benchmark forecast for the average price of Brent crude in the second quarter of 2026 is about $95 per barrel; if the conflict and the strait disruptions prove to be more severe and more persistent, then in the bull market scenario, the average price could be around $130 per barrel.

(The above analysis comes from Citi Bank’s research on April 7; for reference only)

1.3 billion barrels of crude oil returning to the market—who is crazily placing orders in the first second for the Strait to restart?
The partial cooling of the situation and the reopening of the Strait will, in theory, allow Middle Eastern exporters to ship out the massive energy reserves previously trapped in the Gulf, providing immediate relief to the nearly suffocating global energy market. According to data from analytics firm Kpler, currently around 130 million barrels of crude oil and 46 million barrels of refined products are stuck on about 200 oil tankers in the region. In addition, 1.3 million tons of liquefied natural gas (LNG) is also anxiously waiting onboard for a safe passage. For Asian economies that rely on Middle East oil and natural gas—60% and 80%, respectively—this “physical supply disruption” has forced multiple countries into energy rationing. The release of this batch of stranded cargoes will greatly ease the most extreme pressure currently facing Asia’s energy systems.

However, clearing a backlog of orders is only one side of the problem. Getting tankers out of the Persian Gulf is still manageable, but persuading shipowners and charterers to redeploy vessels back to the region is another psychological game. An unprecedented blockade has sharply reduced the availability of global tankers, and freight rates have surged to record highs. During this period of ceasefire, which is highly time-sensitive and extremely fragile, most shipowners will very likely remain extremely cautious, fearing that if hostilities restart their large vessels could be trapped again. As long as shipowners’ cautious sentiment does not fade, any attempts to fully restore normal trade flows will be hindered.

More severely, there is physical destruction at the infrastructure level. Refineries and terminal ports damaged in missile and drone attacks will have repair cycles measured in months and even “years.” Saud Kavonic, head of energy research at MST Marquee, said that due to structural damage to export infrastructure and the need to rebuild inventories, the global crude oil market will remain tighter than pre-war expectations by 3 million to 5 million barrels per day over the coming years.

(Analysis comes from a research report published by Reuters analyst Bousso on April 8; for reference only)
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