Oil: Supply shock drives global divergence – BNY

BNY’s Bob Savage highlights a severe Oil supply shock, with front‑month Brent spiking above $140 and forward prices far lower, tightening global financial conditions. The bank warns that prolonged disruption to Oil and LNG could tip the world toward recession and intensify stagflation risks, with Asia seen more vulnerable than the US and fiscal subsidies adding to bond market volatility.

Front-loaded curve tightens financial conditions

"A prolonged disruption to oil, LNG and other war-linked products could trigger a global recession. If we assume world GDP is $100tn, then the cost of energy in 2026 is $4.6tn, or 4.6% up from 3% in 2025."

"The odds of this starting a recession are rising but are not evenly distributed, with Asia seen as more vulnerable than the U.S. For many regions, stagflation has become the central economic scenario. Relative growth spreads may matter more than interest rates in Q2 asset allocations."

"The cost of government subsidies to offset energy shocks along with other rationing measures on energy translates into government budget risks and bond volatility. Twenty nations have enacted energy measures; more are expected should the conflict continue beyond April."

"Current estimates put the fiscal drag at 1.5–3% of GDP globally. Global bonds will differentiate on deficits and growth outlooks."

"The worry for investors is that skewed demand for oil and products moves all asset prices exponentially in April compared to March. A return to shipping by month-end is the alternative scenario and the binary risk for those being too pessimistic. A wait-and-see posture prevails for those managing VAR constraints."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)