The European Central Bank’s Economic Bulletin, Issue 4/2026, carries a short study of how US financial markets respond when a geopolitical shock hits oil supply. Its central finding is plain: oil prices decide how much damage the shock does.
The bulletin starts from two recent events. Russia’s invasion of Ukraine and the current war in the Middle East were the largest geopolitical shocks in recent years. In the two weeks after each began, oil prices rose by about 30% and 50% respectively. Shocks that disrupt global energy supply, such as a closure of the Strait of Hormuz, push oil higher, the ECB wrote, and that fuels inflation and probably deepens the hit to growth.
A new way to measure it
The analysis relies on an index from Iacoviello and Tong (2026), who used artificial intelligence to read over five million US newspaper articles. Their method separates events that touch energy supply, such as the Gulf War or the current Middle East war, from those that do not, such as the 2015 Paris terrorist attacks. The ECB staff focused on days when the index stood two standard deviations above its average, and fed the oil price moves on those days into a Bayesian vector autoregression model of US markets.
What the model shows
The scenario was calibrated to a 10% fall in US stock prices in the first month. Under it, oil rises by around 30% and stays above pre-shock levels for around two quarters. Industrial production contracts with a lag, by up to 1% after six months. The effect on US consumer prices is modest. Markets take the larger blow: stock prices stay about 20% below their pre-shock level after two quarters, the dollar appreciates continuously, and the VIX index of expected volatility and corporate bond spreads both climb. Risk-free rates fall.
Shocks that leave oil supply alone look very different. Oil prices dip slightly, because higher geopolitical risk weighs on industrial production and demand. Cheaper oil lifts real household incomes and trims production costs, which cushions the blow. Stock declines are less pronounced, and risk metrics recede after two quarters. Consumer prices fall in the medium term instead of rising.
The 2026 war against the model
Around 20 million barrels of oil normally pass through the Strait of Hormuz every day. Even with some flows rerouted through pipelines, the net supply loss has amounted to 10-15 million barrels per day, or 10-15% of global supply. Oil temporarily rose to nearly USD 120 per barrel, more than historical patterns would predict for a shock that size.
Everything else reacted less than expected. Stocks fell but began rising again after about one month. The dollar gained in March, then by April stood almost where it began the year. Risk spreads widened to about half the level history suggested, then returned to pre-war levels. Risk-free rates rose instead of falling, which the ECB said might reflect worry about inflation.
The bulletin offers possible reasons: strong US macroeconomic fundamentals, US oil exports and heavy investment in AI-related stocks. It still called the limited repricing “striking” given the oil shock. Markets may be treating the disruption as temporary. If the conflict persists, or monetary policy reacts more aggressively than expected, financial assets could face sudden repricing and potentially rapid sell-offs.
