Oil and gas prices skyrocket, putting pressure on Europe! Is the Eurozone economy on the brink of a brief upheaval or the eve of a new crisis?

In the coming four weeks, Europe will face the decision of whether the sudden 50% surge in natural gas prices in just one day is a new crisis or just a bump in the road of its economic recovery. If the geopolitical conflict between the US and Iran in the Middle East escalates into a prolonged military standoff, it could disrupt the nascent recovery of the Eurozone, and also rekindle the energy inflation pressure that the European Central Bank has been trying to contain in recent years, bringing back the energy crisis from four years ago along with a crisis in the cost of living for the population. For Europe, which has never relied on Middle Eastern energy transport as much as in the past two years, particularly on Qatar's natural gas resources, a long-term geopolitical war in the Middle East that keeps oil and gas prices high could force governments to increase spending to protect voters from the impact of soaring energy costs, putting significant pressure on current leaders. US President Donald Trump stated that the military strikes by the US and Israel against Iran could last for four weeks - these strikes have already resulted in the death of Iran's Supreme Leader Ayatollah Ali Khamenei, sparking a powerful retaliation from Iran against Israeli territory and various US military bases in the Middle East, leading to a surge in energy costs and effectively halting energy transport through the Strait of Hormuz. With Trump announcing that the military action against Iran will not stop until its objectives are achieved, potentially lasting for four weeks, and with the conflict spreading beyond Iran and Israel to other Middle Eastern economies - such as Iran targeting US critical infrastructure in Dubai, Abu Dhabi, Bahrain, and Kuwait with drones and missiles, and Lebanon initiating rocket attacks on Israeli territory, the ongoing unpredictable geopolitical turmoil in the Middle East and the potential ripple effects of rising oil prices have provided fund managers with new reasons to sell off stocks and other risky assets on a large scale, and instead seek refuge in traditional safe-haven assets like gold, the US dollar, as well as commodities like oil and natural gas that are expected to benefit substantially from the geopolitical dynamics in the Middle East. On Monday, the US stock market closed with the S&P 500 index almost flat, significantly rebounding from earlier sharp declines during trading. Traders are still weighing the potential impact of the escalation of geopolitical conflicts in the Middle East on financial markets, as the conflict has triggered a swift surge in the Brent crude benchmark oil price on Monday. Due to any passing merchant ship potentially facing accidental fire from either the Iranian military or US forces, oil and LNG shipping through the Strait of Hormuz has completely halted, and a major Saudi Arabian refinery has experienced production interruptions, severely impacting the energy market supply, leading to a rise in oil prices. Brent crude futures prices closed up by around 6.7%, reaching nearly $78 per barrel, marking the largest single-day increase since June last year. The duration of the war will determine the extent of pressure on the European economy If this military action against Iran continues for a longer period, it could potentially disrupt the budding recovery of the Eurozone and awaken the inflation monster in the Eurozone once again. Senior analyst Kasten Bruesski from ING believes that the Eurozone, with its dependence on oil and gas from the region, is the economy that is most exposed to spillover risks from Middle Eastern geopolitics among major global economies. "If the conflict lasts for a short time and energy prices only rise temporarily, the damage will be strictly controlled," commented macro strategists Antonio Barroso and Simona Deakeri from Bloomberg Economics, "However, if the military war between the US and Israel against Iran is prolonged and keeps oil and gas prices at high levels, governments may be forced to increase spending to protect voters from rising costs - and this crisis could put tremendous pressure on sitting leaders." As shown in the figure above, higher energy costs will significantly impact the economic growth and anti-inflation path of the Eurozone. Earlier this year, the economic outlook for Europe was positive. Greater government spending in Germany and other core Eurozone countries, as well as recent reasonable pricing trends in natural gas in terms of supply and demand, were expected to provide significant support for further modest economic expansion and inflation close to the 2% target of the European Central Bank. However, the escalation of tensions in Iran comes after the US tariff issues were once again thrown into confusion, with the Supreme Court overturning the initially implemented global equivalent tariff measures by US President Trump. Currently, very few economists are panicking that the Eurozone will deviate from its established path of economic recovery and anti-inflation. Holger Schmieding, Chief Economist at Berenberg, stated that although Brent crude oil prices briefly surpassed $80 a barrel on Monday, he continues to base his international oil price outlook on an average price of $65 to $70 per barrel, and describes this recent increase as likely just a "short-term surge." "I expect Trump will do everything possible to prevent sustained increases in energy prices, as that would hurt him in domestic elections," Schmieding said, "Even before the strike on Iran, US voters were already blaming him for high consumer prices, especially high energy prices." Iran also has a strong incentive to avoid excessive tensions in the Strait of Hormuz - this passage carries about one-fifth of the global sea-borne oil and gas shipments. "Oil imports of major Asian economies like China highly depend on this maritime passage, so the Chinese side would undoubtedly pressure Tehran to avoid jeopardizing this shipping channel," said Unicredit economist Edoardo Campanella. How will energy and geopolitical risks be transmitted to European growth, inflation, and policy prospects? "The US and Israel's strikes against Iran and Tehran's retaliation have pushed oil prices from an average of $65 per barrel before the escalation to nearly $80 per barrel. If the supply through the Strait of Hormuz remains cut off, oil prices could soar above $100. European natural gas prices have also surged significantly, and if the conflict escalates further, there is even greater upside risk. When we incorporate these scenarios into our internal economic model, the CPI of major developed economies will rise, while GDP will decline, thus providing conflicting policy signals for major central banks around the world," stated a team of macro strategists from Bloomberg Intelligence. Although ECB board members Gabriel Markuloff and Martin Coe recently stated that it is too early to assess what the military attacks on Iran over the weekend mean for the Eurozone economy, Belgian Central Bank Governor Pierre Wunsch has outlined a series of negative consequences that could arise from a prolonged war. "I certainly wouldn't rush to react to any fluctuations in energy prices," he said, "But if the Middle East geopolitical military conflict lasts longer, if energy prices rise even higher, then we will have to run the models to see what will happen." Philippe Lane, Chief Economist of the European Central Bank, stated that the ECB "will closely monitor developments." In an interview with the Financial Times, he cited simulations of economic and inflation scenarios conducted by ECB staff, showing that a short-term disruption in energy supply due to the Middle East war would lead to a significant spike in energy-driven inflation and a sharp drop in economic output. Wunsch stated that while the European economy is likely to take a hit, the rising costs of commodities will ultimately constitute a net inflation effect. In fact, earlier that day, traders had substantially reduced their bets on further interest rate cuts by the European Central Bank this year. They will closely monitor the trends in European natural gas prices. Following an Iranian drone attack on a US military base leading to intercepted missile fragments falling on a Qatar energy base, Qatar temporarily halted production at the world's largest oil and gas export facility, leading to a spike in European natural gas prices of up to 54%. This timing is particularly unfortunate for Europe. Due to the abnormally low levels of natural gas storage in major European gas inventories, the region will have to import and stockpile large quantities of liquefied natural gas this summer in order to refill storage facilities before the next winter arrives. The latest estimates from Morgan Stanley show that a long-term impact of a $10 per barrel oil price shock would increase the Eurozone inflation rate by a full 0.4 percentage points. Meanwhile, economic growth would decrease by 0.15 percentage points. The market is currently betting on a manageable conflict, with Europe not falling into complete disorder As of now, the early price movements in the energy markets do not seem to pose any substantial risk to the economic growth or inflation prospects of the Eurozone. This largely depends on how long the military conflict between the US and Iran will last, and how long the disruption in oil transport through the Strait of Hormuz will continue. About one-fifth of global oil consumption passes through this strait. A recent forecast by the European Central Bank indicated that consumer price increases will remain below the 2% target level set by the bank until 2028, and economic growth will rise from 1.2% in 2026 to 1.4% next year. The figure above shows the latest inflation and economic growth forecasts from the European Central Bank. Currently, most economists do not see the rise in oil prices as a permanent significant adjustment. "Investors' pricing behavior remains quite cautious, with the geopolitical conflict seen as relatively short-lived," stated Tobias Basse, an economist at NordLB. He pointed out that the German benchmark DAX stock index - currently at 24,638 points, is still focused on the important psychological milestone of 25,000 points. BlackRock, the giant asset management firm, shares a similar view. "The market and clients we have spoken to see this round of oil price surges as a temporary fluctuation rather than a long-term supply shock, and there is a significant difference between the two," stated Karim Chedid, Head of Investment Strategy at BlackRock EMEA in a media interview, "Overall, this is not the kind of super event that would cause seismic shocks to inflation."