Middle East Turmoil: Unsettled and Unsettling

A new Citi Research report from a team of economists led by Johanna Chua looks at the Middle East conflict, the energy shock it’s created, and why the global macro impact has —at least so far — looked surprisingly muted. 

We’re in the middle of the largest physical energy-supply shock in history, as the International Energy Agency has called the current Middle East conflict the most severe disruption the global oil market has ever seen. Yet the global macroeconomic impact has so far looked more muted than what we saw in past oil shocks. Real oil prices had risen roughly 46% month to date through late March — significant, but far smaller than the more than tripling seen during the 1973 Yom Kippur War or the more than doubling that followed the 1978–79 Iranian Revolution.

Oil Price Outlook: Wide and Uncertain Ranges

Our commodities team forecasts Brent crude to average $110 to $120 a barrel in the near term. If de escalation occurs by the end of April, prices are seen moderating to a range of $70 to $80 a barrel in the year’s second half. But this scenario is highly uncertain. A more adverse outcome — a longer conflict in which energy infrastructure is damaged further or Strait of Hormuz transit is disrupted through midyear — could see Brent reach a bull case $150 a barrel, with $130-a-barrel averages forecast for the second and third quarters.

Why Our Macro Downgrades Are Limited

Despite these risks, our macro adjustments remain limited. Since February, we’ve downgraded emerging-markets (EM) growth by just 0.2 percentage point and lifted our 2026 inflation forecast by 0.2 percentage point, followed by a decline in 2027 inflation. Several mitigating forces help explain this resilience:

• Energy intensity of gross domestic product is far lower than it was in the 1970s.
•  Energy mixes are more diversified, with renewables now playing a materially larger role.
• Governments have executed the largest-ever joint release from strategic reserves — roughly 400 million barrels, far exceeding releases during the 2022 energy crisis triggered by the Russia–Ukraine conflict.

Another factor potentially tempering macro spillovers is the backwardation in longer-dated oil and gas futures. While physical spot prices have surged, longer dated contracts suggest markets expect either a relatively short lived shock or persistent disruptions to drive demand destruction that will be sufficient to limit lasting supply impact.

Which Economies Are Most Exposed

To better understand countries’ economic vulnerabilities, we focus on their relative exposures. Outside the Middle East, EM Asia — especially South Asia — faces the greatest risks, followed by developed Asia and parts of Africa, notably Kenya and Egypt. More-industrial/developed Asian economies such as Japan, South Korea, Taiwan, China, and Singapore possess stronger buffers against a shock, but are also likely to bid aggressively for liquid natural gas (LNG), pushing up global gas prices and so affecting Europe. Our commodities team has made significant revisions to both Asian (JKM) and European (TTF) gas benchmarks.

Lower income economies with limited inventory/storage, refining capacity, and fiscal capacity are most vulnerable to fuel and gas shortages. This includes Pakistan, Sri Lanka, Bangladesh, the Philippines, Cambodia, Vietnam, and possibly Kenya. Some countries have partial buffers, but LNG risks are particularly acute and gas markets may face deeper and longer lasting dislocation than oil markets. Within this context, South Asia appears especially exposed.

FX Performance Tracks Energy Trade Balances

Relative EM FX performance has largely tracked net energy trade balances, though policy choices, relative positioning and policy stances all matter. Net exporters led by Kazakhstan have outperformed, while currencies such as the Egyptian pound and South African rand have underperformed amid investor outflows and more-flexible exchange regimes. Still, several currencies — Pakistan’s, Turkey’s, Singapore’s and China’s — have proved surprisingly resilient. Latin American FX has also held up well given the region’s relative energy self sufficiency and access to North American gas.

Pass-Through to the Real Economy

The pass through of higher energy prices to the real economy varies widely. Fuel pricing mechanisms range from full deregulation to stabilization funds, formula based adjustments and outright intervention. Nigeria and the Philippines have seen the sharpest transport fuel price increases, though for different reasons — deregulation in Nigeria vs. a pure supply shock in the Philippines.

Renewables, Fuel Switching, and Fiscal Risks

Electricity prices are generally more regulated and adjust more slowly, amplifying fiscal risks if governments intervene for prolonged periods. Net energy importers reliant on gas and oil for power generation — such as Singapore, Egypt, Israel, and Thailand — are most exposed, while economies with more diversified energy mixes are better insulated. Since 2021, the share of wind and solar in global electricity generation has risen sharply, and this rise in renewables use has also helped reduce vulnerability. Coal prices have also lagged oil and gas, enabling some fuel switching.

Fiscal risks could rise if the shock persists. Countries with interventionist tendencies and limited energy windfalls — such as Egypt, Turkey, Indonesia, and India— bear watching. By contrast, fiscally strong industrial Asian economies such as South Korea and Taiwan and net energy exporters — a category that includes much of Latin America, Malaysia, Kazakhstan, and Nigeria — look like they’re in a much better position.