Key Highlights

• A $10 per barrel increase in crude oil prices can shave 0.3% off global GDP in the short run, potentially more in EM and the Eurozone
• Lower global growth, sticky inflation forces governments to consider subsidies for growth/inflation balance over monetary policy
• Ability of equity markets to look through oil shocks depends on positions and duration

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Higher energy prices on demand are good for stocks, higher prices due to supply constraints are bad

EXHIBIT #1: EMEA EQUITY MARKET GROWTH BETA VS. NATURAL GAS FUTURES

_{Source: BNY, Bloomberg}

The surprise events of June, with the conflict between Israel and Iran driving oil prices up 15%, leaves economic outlooks more uncertain, with higher inflation risks and lower growth. The longer the conflict lasts, the higher the risk of oil price spikes. Oil shocks, like bull markets, are defined as sustained price increases of 20% or more. Traditionally, oil prices rise as world demand increases, while shocks are seen as reaching demand destruction levels. The ability of the current stock market to hold on to May gains surprised many U.S. investors this week. Some of this represents the 20-year shift to U.S. energy independence, some the depressed oil prices that were in play before this event – as oil prices are just 10% over their longer 200-day average. Furthermore, EU and U.S. markets have seen a steady drop in energy intensity, meaning for every 1% of GDP, the energy used to generate that growth is less than 0.5%. The biggest users of energy for growth are emerging markets, with the BRIC nations using 5% more energy in 2023-24 and OECD using 1.5% less. The correlation between demand and the increase in energy prices and stocks is key to understanding the risks for Europe and the U.S. ahead. The shift in German spending and its correlation to natural gas stands out in 2025.

Our take 

The role of oil has shifted in EU growth dynamics, with renewables and natural gas playing a more significant role over the last 10 years. The current link of EM risks to more carbon-linked energy prices looks important as well. The worries about growth that were seen in summer 2024 linked to rates being high for longer in Europe and the U.S. showed up in developed market equities, with the bottom in November when the FOMC and ECB both were cutting rates aggressively. Current price and growth expectations in developed Europe are not stretched as they were at the beginning of February, providing some room for modest energy price volatility. Furthermore, as we dig into EM EMEA companies in the energy sector, we see Poland and Hungary in a good position to benefit from higher energy prices, similar to what we saw in Q3 2024.

Emerging market oil demand growth in EMEA remained resilient – Q2 2025 barrels-per-day up 2% y/y, led by Turkey and Egypt, with strong transportation sector activity. LPG and gasoline demand was catalyzed by public sector infrastructure spending and tourism seasonality. Power demand in GCC nations remained robust due to a high air-conditioning load. Poland, Hungary and the Czech Republic saw stable to slightly improved industrial electricity use.

Forward look 

The risk of an oil shock in the EU is not zero, and the current 15% move will clearly make the ECB’s task of fine-tuning policy after its easing more difficult. The risk for emerging markets is complicated. From a stock valuation perspective, the EM energy sector is attractive. Forward EV/EBITDA multiples for regional energy remain at 5.3x – a 20% discount to the global peer group average, though the gap narrowed modestly on 60-day rolling basis. Yield support remains a draw – Saudi, UAE and Polish names are averaging 5-6% 2025E dividend yields. The energy vs. industrial sector comparisons in EM EMEA will be important to watch in the weeks ahead. Energy costs have not mattered yet, but another 10% increase in oil beyond $80bbl for Brent will drive investors to make harder decisions for Q3 allocations.

Energy costs have a lag on growth, investment key to sustainability

EXHIBIT #2: GLOBAL ENERGY COSTS AS A PERCENTAGE OF GDP AGAINST ENERGY SECTOR HOLDINGS

_{Source: BNY, IEA, Bloomberg} 

Our take 

The cost of energy as a percentage of global growth has been sticky in the post-Covid era, with government subsidies and support a key factor. Markets did not buy into the energy sector, particularly new oil or natural gas projects. This makes the current oil supply shock more problematic in the medium term. While Iranian oil, with production at 3mbd, is important, it can be made up with more supply from OPEC+. However, any blocking of the Strait of Hormuz will matter to 20-25mbd. The critical chokepoint for global transportation could be disrupted and has led to some speculation in oil prices this week. Overall, oil accounts for 39% of all the word’s energy use, but price spikes have a larger role to play beyond the energy sector, as petrochemicals matter to many supply chains beyond energy use.

Forward look 

The role of energy and investment and the link of both to growth is not yet at a breaking point given the weaker growth outlooks for 2025. The ability of the world to live with higher oil prices and a multi-week disruption will return the focus to strategic petroleum reserves. Right now, the world has about 100 days of supply, but this is not well distributed across the world. It is estimated the U.S. has 402 mb in strategic reserve holdings, while China is thought to have 350mb and Japan 324mb. Places outside of this, like India or the EU, bring the global total to 1.2 billion barrels. Tapping this supply could matter should the worst-case scenario for oil play out in the weeks ahead. Furthermore, the ongoing focus on supply matters – particularly in EM markets, where oil flows had been positive before this week. Money flows in EM Energy have also been positive.  Looking at ETF flows, regional energy ETFs (notably iShares MSCI EM Energy) saw net inflows in the last month, bucking broader EM sector outflows. Demand is concentrated in Middle East-focused funds as Saudi/UAE weightings increased due to index composition shifts. 

The investment in EM this year has been focused on Industrials and Real Estate – both are at risk, while Energy and Utilities have opportunities

_{Source: BNY, MSCI}

Our take 

The EM Energy sector is more important to watch than the U.S. or EU. There are some bullish and bearish factors to watch here:

• Compelling Dividend & Cash Flow Support: High regional dividend yields (5-6% for Saudi Arabia, the UAE and Poland) and robust FCF, even in a high-rate environment.

• OPEC+ Discipline & Structural Demand: Recent OPEC+ rollover secures floor for oil prices – EMEA producers most leveraged to upside.

• Energy Security & Policy Tailwinds: EU and local governments incentivize regional self-sufficiency (CCUS, hydrogen, RES capex), underpinning infrastructure investment. 

• ETF/Institutional Flows: Positive money flow into EMEA-focused energy ETFs and increased macro fund allocations to the region signal improving sentiment and potential sector rotation tailwinds.

Against the positive points, the EM Energy sector has persistent underinvestment and inflation risks. The weakness of the USD has led to some FX-driven margin pressure, and sovereign risk premiums compressing valuation upside.

Forward look 

The Energy sector in emerging EMEA remains a high-conviction play for yield, cash flow resilience and energy transition exposure – particularly in the GCC and select Eastern European Companies. However, the landscape is bifurcated: optimism driven by OPEC+ price discipline, ongoing policy support and institutional inflows is countered by persistent margin pressures, political/regulatory overhangs and project execution risks. Tactical allocation favors a barbell approach – overweight high-quality, yield-heavy producers and integrated companies in policy-stable regimes; maintain defensive positioning in frontier/high-beta names until macro and regulatory clarity emerges. Near-term, investor focus should remain on OPEC+ reactions to current price spikes from the unexpected flareup between Iran and Israel.

Bottom line

The recent 15% surge in oil prices following the Israel-Iran conflict has introduced significant economic uncertainty, potentially shaving 0.3% off global GDP in the short run – with emerging markets and the Eurozone facing a steeper potential reduction. This shock makes it challenging to balance growth and inflation, forcing governments to consider subsidies over monetary policy adjustments. The role of bond market reactions to government deficit spending adds another twist to all risks, with money flows eyeing asset allocation pressures. Market resilience partly stems from U.S. energy independence and current prices remaining only 10% above the 200-day average. Critically, demand-led increases in energy prices benefit equities, while supply constraint-driven spikes harm markets. How current levels of oil supply and price drive inflation 3-6 months forward seems modest given the other growth uncertainties – from trade to deregulation along with further monetary easing. Furthermore, the EU and U.S. have reduced their energy intensity, while BRIC countries increased their energy usage by 5% in 2023-24 against the OECD’s 1.5% reduction. Looking forward, the EM EMEA energy sector presents attractive investment opportunities as they are at the crossroads of industrial and energy investment trade-offs. While Iranian production (3mbd) could be offset by OPEC+, any Strait of Hormuz disruption would impact 20-25mbd, potentially requiring strategic petroleum reserve deployment and more subsidies on energy from governments. A tactical barbell approach is recommended – overweighting high-quality, yield-heavy producers in policy-stable regimes while maintaining defensive positioning in frontier names until regulatory clarity emerges.

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