Risk appetite has improved and the US Dollar’s safe-haven support has eased, but oil supply conditions remain tight. The Strait of Hormuz has been closed, limiting physical oil movements.
RaboResearch forecasts that even if the war ends this month, oil supplies through the Strait will recover to only 80% of pre-war levels by late August. This points to ongoing inflation risk and potential disruption to energy demand.
The UK and the Eurozone are exposed because they import energy, so higher oil and gas prices can worsen their terms of trade and push inflation higher. Within Europe, exposure differs by country due to variations in the energy mix.
These differences have been reflected in European bond yields in recent weeks. The article notes it was produced with the help of an AI tool and reviewed by an editor.
Despite some calm in broader markets, the physical oil supply crunch is real. We expect oil flows will struggle to recover through the summer, keeping prices elevated and volatile. Traders should consider buying call options on Brent crude futures, which are currently trading around $115 per barrel, to position for further price shocks.
This supply shock directly fuels inflation, making it harder for central banks to cut interest rates. Recent data shows Eurozone inflation for March 2026 was nearly 6%, forcing us to reconsider the entire interest rate outlook for the rest of the year. Betting on short-term interest rates remaining high via futures markets seems prudent.
As major energy importers, the Eurozone and the UK will bear the brunt of this crisis through worsening trade balances. Even though the dollar’s immediate safe-haven appeal has faded, the fundamental economic damage suggests the Euro and Pound will likely weaken against it. We see opportunities in buying put options on EUR/USD and GBP/USD.
Within Europe, the economic pain will not be spread evenly, a fact already visible in government bond markets. The spread between Italian and German 10-year bond yields has recently widened to over 200 basis points, its widest in years, reflecting this divergence. This trend is likely to continue, making a trade that shorts Italian bond futures while buying German bund futures attractive.
We only need to look back to the energy crisis of the early 2020s to see how these situations can lead to stagflation. Just last year, in 2025, we were confident that the worst of global inflation was behind us. This supply shock has completely reset that narrative for the foreseeable future.
