Dwindling fuel reserves leave energy markets exposed to renewed Middle East shocks: IMF

The possibility of a renewed Middle East conflict looms large, which could prolong commodity price volatility, further disrupt energy supply chains and keep global oil and gas prices elevated as inventories decline, the International Monetary Fund said in its July economic outlook.

In the update of the World Economic Outlook titled Global Economy in Crosscurrents, the IMF said that although the global economy had weathered the shock from the war better than feared, the transmission was still in the early stages, since commercial and strategic destocking had provided temporary relief from reduced energy flows.

"Energy prices are projected to remain higher than they were before the war. Renewed conflict would propagate through a further increase in commodity prices and extended volatility, supply shortages and exchange rate pressures," it said.

The muted increase in oil prices and their limited impact on activity owe to the release of inventories, which are now approaching multiyear lows and could reach stress levels if supply disruptions continue or hoarding gathers steam.

"Even if inventories are not depleted, if the shock is perceived to repeat or become more permanent, willingness to accommodate it with drawdowns could weaken, with potentially non-linear dynamics in prices. Actions by individual countries to secure domestic supply and to replenish inventories could further amplify global price pressures," the IMF said.

The International Energy Agency said July 21 that it had released 290 million barrels of the 400 million barrels committed by its member states in response to the Middle East conflict and is "monitoring the situation" following a new flare-up in hostilities.

The US, responsible for 40% of the 400-million-barrel collective action, has already drawn down its SPR to 40-year lows, taking reserves close to the minimum operating threshold experts say is needed to support the salt caverns it is stored in and to keep pipelines functional.

The IEA, which mandates minimum stockpiling thresholds for its member states, announced its largest-ever collective action in March, committing to release more than 400 million barrels of oil into the market across 30 member states. The agency still has access to over 1 billion barrels of government-controlled stocks.

Implications on growth

The IMF said global growth is projected at 3% in 2026 and 3.4% in 2027, down from the 3.5% average observed in 2024 and 2025. The modest slowdown reflects the effects of the Middle East war being partly offset by accelerated demand-driven momentum in the global technology cycle, supported by advances in artificial intelligence and its adoption. The impact varies widely based on countries' exposure to the war and their position in the technology value chain, it added.

"Energy exporters outside the conflict zone benefit from favorable terms of trade, whereas economies plugged into the technology-led upturn experience stronger activity even if they are energy importers. In contrast, activity weakens for energy importers with limited participation in the technology value chain, a group that includes many low-income countries," the IMF said, adding that global headline inflation is expected to rise from 4.1% in 2025 to 4.7% in 2026, before declining to 3.9% in 2027.

Many countries have resorted to fiscal tools in response to the Middle East war. Energy-related fiscal support, especially price-distorting measures, should be removed as the energy shock eases to preserve fiscal buffers, the IMF said.

More generally, fiscal policy should avoid broad-based subsidies, tax cuts and price controls, which are typically poorly targeted, fiscally costly and politically difficult to unwind. If support is deemed necessary, it should be temporary, tightly targeted to vulnerable households and embedded in a macroeconomic policy mix consistent with price stability, it added.

"The bar for supporting firms should be high: any support should be for viable, energy-intensive firms, conditional on energy efficiency improvements," the IMF said.

Sailing through crisis

International cooperation remains critical to manage spillovers, including commodity market pressures, the IMF said.

"Export bans should be avoided, because they not only exacerbate the strain trading partners feel, by triggering supply shortages and increasing global price volatility, but also distort domestic resource allocation by artificially depressing prices at home," the IMF said.

Crude oil prices rose to fresh six-week highs on July 21 amid continued Middle East tensions. NYMEX August WTI settled $1.68/barrel higher at $84.91/b, while ICE September Brent climbed $1.79/b to $91.01/b. Houthi threats against Saudi shipping have prompted some tankers to avoid the Bab al-Mandab Strait or consider longer, safer routes, even as cargo-tracking data and Asian refiners and shipbrokers suggested there was no major disruption to overall Yanbu crude liftings.

The IMF said the possibility of second-round effects from higher energy prices has raised the prospect of policy rate paths through 2026, despite crude oil prices falling from earlier highs. Several central banks in both advanced and emerging market economies have already been raising policy rates, it added.

"In crude oil-importing Asian emerging markets, deterioration in the terms of trade has worsened the inflation outlook and put pressure on exchange rates, prompting a sharper upward repricing of expected policy paths. Energy exporters outside the Middle East, by contrast, have seen stronger currency performances, which have helped contain inflation expectations and risk premiums," the IMF said.