The Conflict in the Middle East has come to an end. Will the energy shock triggered by the conflict stop dominating global economic prospects from now on?
The 2026 Energy Shock
Some form of energy shock has preceded most of the major economic recessions over the past three centuries. The global oil supply disruption caused by the blockade of the Strait of Hormuz, triggered by the Israel-US war on Iran that began on February 28, 2026, is a quintessential energy supply shock and should be viewed as highly adverse for global economic prospects. The shock triggered a market panic in March 2026; US stocks declined by an average of 7.8% and Indian stocks by 12.4% during the month; oil prices climbed by 59%; gold, considered a safe haven, declined by 17%. Stock prices have since recovered most of the lost ground, whereas commodity prices continue to reflect heightened uncertainty.
Though we may not feel it now, the intensity of the 2026 energy shock is nowhere near that of the 2022 shock following the Russian invasion of Ukraine. The 2022 shock was broader, and its magnitude and duration were more than double those of the 2026 shock. With a 32% share of the energy mix, crude oil might be the largest energy source today. But coal and natural gas closely follow, with shares of 27% and 24%, respectively. The 2026 shock was largely confined to crude oil, whereas in 2022 it included natural gas and coal. In 2022, coal prices rose sharply from $170 to $400 per tonne at the onset of the war, and it took nearly a year for prices to return to pre-war levels. But in 2026, coal prices hadn’t yet exceeded $150 per tonne. Similarly, in 2022, natural gas prices spiked from $4.44 to $9.00 per MMBtu and took almost 10 months to return to pre-war levels. Natural gas prices have remained within the $2.50-$3.25 per MMBtu range during the latest conflict. In 2022, the crude oil price spiked from $80 to $110 per barrel and took a year to return to pre-war levels. This time, in 2026, the onset of the conflict in the Middle East drove prices from $73 to $105 per barrel, and now, with the end of the conflict in sight, prices have already retreated to $83 per barrel, all within 3.5 months.
We shouldn’t be too carried away by the peace deal announced this week, which ends the more than three-month conflict in the Middle East. In some of the energy shocks over the past three centuries, even after the shock’s cause was resolved, the economy still had to endure a recession. The main reason was that the resolution came too late. The longer the disruption, the greater the technical complexity and other challenges involved in restoring production and distribution to normal. We face the same risk today.
Some experts argue that the current energy shock should have pushed oil prices to $150-$200 per barrel, but they didn’t, partly because of the large strategic and commercial energy reserves held globally beforehand. By tapping into these reserves, countries were able to significantly buffer the impact of the recent energy shock on their respective economies. However, if production and distribution fail to return to normal promptly, and oil reserves run low due to continuous tapping to cover the shortfall, this raises the possibility of prices rising again, perhaps to $150-$200 per barrel.
Daily global oil consumption is around 100 million barrels per day (bpd). The conflict has kept nearly 20 million bpd out of the market. The world has cumulative strategic and commercial oil reserves of 8 billion barrels. If we are to meet the 20 million-barrel-per-day shortfall from reserves, we would run out of reserves in 13 months. We are already 3.5 months into the conflict, so we probably have around 10 months of oil reserves left before prices rise towards $200 per barrel, unless production and distribution return to pre-conflict levels. That would be a very debilitating shock to the global economy. Let’s hope the global oil supply returns to pre-conflict levels smoothly and quickly. For that, the peace deal mustn’t be derailed in any way.
Multiple Economic Shocks
Apart from energy supply shocks, other common disruptors of economic growth include war, fiscal and monetary policy tightening, and harvest failures. Yet, contrary to popular belief, none of these shocks alone is powerful enough to bring about an economic recession. It requires a series of economic shocks to coalesce to engender an economic recession. However, perhaps to simplify matters, people often assign blame for a recession entirely to any one of these shocks, often the most recent. Such an incomplete understanding can significantly undermine the effectiveness with which investors and policymakers navigate the situation.
This means that the 2026 energy shock, in the form of an abrupt supply disruption and the consequent steep oil price spike triggered by the war in the Middle East, alone can’t cause a steep decline in financial markets or an economic recession. For that, multiple overlapping and interacting economic shocks must exert simultaneous pressure on the economic system. But the 2026 energy shock is not the first economic shock to befall the global economy in recent years. Nearly a year ago, we had another economic shock when US President Donald Trump imposed steep tariffs on imports from almost all of the US’s trading partners. Many of the new tariffs were later slightly lowered but remain well above post-World War II historical averages. If we go a little further back, there is another, more consequential shock that I believe continues to stress the global economy today, even though it happened more than three years ago: the sharp interest rate hikes of 2022-2023.
Higher interest rates, higher trade tariffs, and an energy shock are the leading economic shocks currently jolting the global economy. To this assemblage, a new (fourth) shock might arrive, thanks to the conflict in the Middle East: higher inflation. In India, retail inflation has climbed steadily from 2.74% at the start of the year to 3.93% in May 2026; in the Euro Area, it has risen from 1.7% to 3.2%; in the US, it has risen from 2.4% to 4.2%. The risk of high inflation has surely escalated over the course of the year. For the US and the Euro Area, the situation is more alarming because they now have negative real interest rates (i.e., the policy interest rate is lower than inflation).
High inflation itself isn’t what harms economic prospects. The adverse effects stem from how central banks respond to higher inflation, namely by hiking interest rates. The European Central Bank is already in the game: it raised its policy interest rates by 25 basis points on June 11, 2026, marking its first interest rate hike since 2023. The Federal Reserve – the US central bank – is expected to follow soon. It has signalled as much while keeping rates unchanged at its latest meeting. If the Fed raises rates, risk capital will move from other countries to the US, and this can only be curtailed if the central banks of other countries raise their respective interest rates in proportion. So, we are very likely ushering in a period of rising global interest rates, and this time it can be more perilous than last time (2022-2023) because the rate hikes are happening from a higher base.
At this critical juncture, the key question before us is whether this – the high inflation and the consequent interest rate hikes to counter it – will be the straw that breaks the camel’s back?
Underplaying Randomness
Recessions are unpredictable. But that is not the general perception. Every time there is a recession, there are always a very few who saw it coming. They are revered for their foresight. They write books and give speeches about how they saw it coming, which become bestsellers and are well received by a full audience. But those who have correctly predicted two recessions are very rare, and I concur that no one has correctly predicted three or more recessions.
Even people revered for their accurate recession predictions had their timing way off. Their predictions of a recession came at least two or three years before the recession materialised. Over the past 300 years, at least one economic recession has occurred every 10 years, so if you keep predicting a recession every year, you are bound to get it right sometime. Recessions are inevitable in a modern economy, but their occurrence is random. It is very likely that a great stroke of luck, rather than skill, played a significant role in those accurate recession predictions.
Suppose the fourth economic shock I anticipate – monetary policy tightening – occurs, but the global economy remains resilient, so there won’t be a recession. Perhaps, from then on, no further shocks arrive, conditions improve, and a new economic expansion begins without the economy going through a recession. Otherwise, a fifth shock may arrive, becoming the straw that breaks the camel’s back and pushing the economy into a recession. Even in such a dark scenario, there are many aspects we can’t foreknow, such as the recession’s timing, magnitude, and duration, as well as its impact on asset prices.
How should equity investors navigate an economic environment with a high probability of a recession? A recession (or even a slowdown) will surely hurt stock prices, which will likely decline. However, the intensity of the decline is debatable and largely unpredictable. If we are lucky, the decline might be limited to a correction. On the contrary, if the impact is severe, it could end in a bear market or a market crash. Nevertheless, waiting out the recession would do more harm than good. The following quote by Peter Lynch will be helpful here: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.“
A Reliable Gauge
Geopolitics have driven markets over the past 3.5 months. A deal to end the conflict has been announced, allowing oil tankers to move freely through the Strait of Hormuz from June 19, 2026, the day the deal is expected to be signed. Oil prices have already retreated significantly. Does that mean financial markets and asset prices will again be driven by economic fundamentals rather than geopolitics – the way they should be? That’s why I have a particular affinity for copper prices, given their reliability in gauging economic prospects. Copper prices seem largely immune to non-economic factors. Copper is an essential commodity for industrial activities, with widespread use in construction, electrical and electronic products, electric vehicles, AI-driven data centres, and renewable energy. Declining copper prices have typically preceded economic slowdowns or recessions.
Copper prices have risen steadily by 38% over the past nine months, from $4.75 per pound in October 2025 to $6.54 per pound today (15 June 2026), its highest level in a decade. This rally is significant because it has pushed prices above the $4.50-per-pound peak set during the 2003-2011 commodity boom. Rising copper prices indicate either of two things: 1) better economic prospects, that is, economic expansion, or 2) high inflation. The price uptrend in the former case is more likely to be sustainable. However, if higher inflation expectations are driving up copper prices, the aggressive interest rate hikes that usually follow high inflation will dampen manufacturing activity and eventually put downward pressure on copper prices. The resulting price decline may or may not be a precursor to an economic slowdown or recession.
Anyway, the rising copper price implies that an economic slowdown or recession is less likely, at least over the next six months. But it in no way helps assess prospects for stock prices going forward, because rising copper prices are a bullish sign if they indicate economic expansion. In contrast, they are a bearish sign if they signal high inflation and interest rate hikes. And we don’t yet fully know which of them is behind the rise in copper prices, although in the current context, higher inflation seems more likely to me.
Final Thoughts
Navigating economic uncertainty is not about improving the accuracy of our forecasts. Instead, it is mostly about building agility and resilience into our systems and processes. No one foresaw the inflation spike that prompted central banks to raise interest rates sharply in 2022-2023. No one foresaw the US tariff hikes on April 2, 2025, either. The same goes for the US-Israel attack on Iran on February 28, 2026, which triggered a severe energy supply shock. We now anticipate a fourth economic shock in the form of monetary policy tightening. But anything we can foresee can’t be the straw that breaks the camel’s back.
Diversification, minimal leverage, a long-term mindset, and regular reviews of the thesis behind each investment position are a few ways we can build portfolio resilience. But it should all begin with us. Without sufficient mental resilience, it is hard to build it into our portfolio and processes. We are prone to knee-jerk reactions to every short-term headline without the necessary mental fortitude.
“I am prepared for the worst, but hope for the best”, wrote British author and Prime Minister Benjamin Disraeli in his 1833 novel The Wondrous Tale of Alroy. The proverb offers sound guidance for those who regularly navigate uncertainty. A recession may be unpredictable, but nothing stops us from making every investment decision on the assumption that one will occur this year. That way, when it truly arrives, we are not caught off guard.
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