Key Takeaways:
The global economy has less capacity to absorb oil supply disruptions as U.S.-Iran hostilities resume in the Strait of Hormuz, the International Monetary Fund warned Wednesday.
The global economy has less capacity to absorb oil supply disruptions as U.S.-Iran hostilities resume in the Strait of Hormuz, the International Monetary Fund warned Wednesday, with 1.1 billion barrels of crude removed from the market between March and May — a larger reduction than during the 1973 oil shock, the Iran-Iraq war in the 1980s or the Gulf War in the early 1990s.
"What cushioned the initial blow this time is that energy markets had room to maneuver and absorb it," the IMF said in a blog post. "As tensions flare again in the Strait of Hormuz, that room is now smaller and shrinking further as spare capacity has been deployed, demand has compressed, and inventories have been drawn down."
The Fund now projects global growth of 3% in 2026, down from 3.1% in April and 3.5% in 2025. The initial impact of the conflict, which began in late February, was smaller than feared because energy prices did not rise as sharply as many economists anticipated. The initial price surge spurred a demand decline of 5.8 million barrels a day, while increased production from the U.S., Venezuela, Guyana and Russia added 1.7 million barrels a day, leaving a shortfall of roughly 4 million barrels a day that was met from reserves held in China and elsewhere, the IMF said.
The breakdown of a June ceasefire and the resumption of U.S. strikes and a naval blockade on Iranian ports have pushed oil prices higher, with Brent crude climbing to about $86.50 a barrel and West Texas Intermediate to $80.35. "A quick supply recovery is essential to avoid further damage to the global economy," the Fund said, warning that unless inventories are replenished, "the world will start from a weaker position when the next shock comes."
Vessel traffic through the Strait of Hormuz fell to a five-week low of six transits on Sunday, ship-tracking data from Kpler show, after Iran's Revolutionary Guards attacked the Cyprus-flagged container ship GFS Galaxy on July 12 and declared the waterway closed. The U.S. has conducted more than 300 strikes on Iranian military targets within a week, including sites at Bushehr, Bandar Abbas and Jask, according to Central Command.
Iran retaliated by attacking U.S. military installations in Kuwait and Bahrain, resulting in at least one fatality and more than 60 injuries. The escalation follows the collapse of the Islamabad Memorandum, a 60-day ceasefire signed in June that had briefly reopened the strait. Before the conflict began in late February, the waterway handled about one-fifth of global daily oil and liquefied natural gas supplies.
The renewed disruption has sent shock waves through financial markets. U.S. Treasury yields rose across the curve, with the benchmark 10-year yield climbing to 4.63% and the policy-sensitive two-year yield to 4.29%, as traders priced a greater probability that persistent inflation could force the Federal Reserve to tighten policy further. Markets now assign roughly a 42% probability of a rate increase at the Fed's July meeting, up from about 27% a week earlier, CME FedWatch data show.
Citigroup warned that the escalation materially increases the risk of further military conflict and could delay any diplomatic breakthrough. "The possibility that the Iranian regime walks away from the memorandum of understanding until after the U.S. midterm elections has also risen, a scenario which would most likely see higher-for-longer oil prices," the bank said.
Goldman Sachs estimated that expanding pipeline capacity in the Middle East could shield more than 60% of pre-war Gulf oil exports from any future Hormuz disruptions by end-2028, with total effective bypass capacity reaching more than 14 million barrels a day. But the IMF cautioned that such buffers take years to build, while the current crisis demands immediate resolution.
"Energy markets' flexibility and prompt policy actions bought the global economy time," the Fund said. "An enduring U.S.-Iran agreement would create an opening to restore supply."
This article is for informational purposes only and does not constitute investment advice.
