We’re really going to feel things from here’ – oil shock reshaping the global outlook

The reprieve to global supply chains and markets as ships that were already through the Strait of Hormuz delivered their cargoes is rapidly coming to an end, Commonwealth Bank Head of FX, International and Geopolitics, Joe Capurso says.

"We've probably had about a five to six week buffer," Capurso said. "But that time period is now coming to an end, and we're really going to feel things from here. Even the two-week ceasefire does not mean the war is over nor will there be a speedy return to full energy exports, because there has been significant damage to infrastructure. "

Uneven impacts across economies

The effects of higher energy prices are being felt very differently across countries, depending on whether they are energy producers or consumers, Capurso said on the latest episode of the CommBank View: Economics & Markets podcast.

"If you're a country like Canada and you're a major exporter of oil and gas, you actually benefit from higher prices," Capurso said. "But if you're Europe or Japan, where you're heavily dependent on imported energy, you're paying more - and there's a risk you don't get the volumes you're used to."

Those pressures extend well beyond fuel. Fertilisers, which are derived from gas, are also being hit.

"Prices for those inputs have shot up since the war began," Capurso said. "Farmers are a good example of an industry being squeezed by both higher fuel costs and higher fertiliser costs."

With those costs having roughly doubled in recent months, margins are under pressure and the increases are likely to be passed on.

"It's inevitable that higher costs will flow through to food prices," Capurso said. "Eventually, households feel that at the grocery store."

China better positioned than most

When it comes to the global impact of the Iran conflict, China stands out as an exception in several respects, Capruso said.

"China has large reserves of oil and many other commodities, which buys it time to adjust," Capurso he said.

It is also the world's dominant producer of renewable technologies and the critical minerals required to manufacture them, from solar panels and wind turbines to electric vehicles.

"We think this global oil shock is going to give another kick along to the decarbonisation process," Capurso said. "And China is going to be a large beneficiary of that."

With oil primarily used for transport fuels, higher prices are also likely to boost demand for electric vehicles - another area where China leads globally.

Pressure on households and spending

In countries where governments allow fuel prices to move freely, higher costs are likely to weigh on household spending.

"You don't stop driving to work or taking your kids to weekend sport," Capurso said. "People tend to use a similar volume of fuel, so they're just devoting more of their household budget to it."

That leaves less income available for discretionary spending, which can have flow on effects across the economy.

"In places like Europe, that's going to hit consumer facing businesses particularly hard," Capurso said.

Central banks face tougher choices

The surge in energy prices is complicating the outlook for central banks, particularly in the US, where inflation risks are reemerging just as policymakers had been preparing to look at cutting rates.

Capurso said CBA now expects some of the energy driven inflation to spill into core inflation in the US, alongside strong underlying demand.

"Higher fuel prices act like a tax on consumption, but the US economy is being supported by very strong investment in artificial intelligence," he said. "Those two forces together mean inflation pressures are likely to persist for longer than previously expected."

Fed won't cut in 2026

As a result, CBA no longer expects the US Federal Reserve to cut interest rates this year. Instead, the bank now forecasts the Fed will begin raising interest rates again from late 2026, with around 75 basis points of tightening expected to push policy back into restrictive territory.

"The energy shock has materially changed the inflation outlook," Capurso said. "Even though the US is largely energy. Higher fuel prices will feed through to consumer prices, and some of that pressure is likely to become more broad based."

At the same time, the US economy is benefiting from what Capurso described as a powerful AI-driven investment boom, which is adding to demand and reinforcing inflation risks.

"The AI capital spending boom insulated the US economy from the tariff shock last year," he said. "It's now acting as a counterweight to the energy shock, keeping growth resilient but also adding to inflation pressures."

The outlook is more challenging elsewhere. In Japan, higher energy prices combined with strong wage growth are likely to keep the Bank of Japan on a tightening path, while in Europe the energy shock is weighing heavily on growth at the same time as inflation pressures reemerge.

"Central banks are being forced to make difficult trade-offs," Capurso said. "They're dealing with an external energy shock that lifts inflation but also slows growth - and that makes policy decisions much harder."

You can read the full report here.