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To explore a critical macro subject for investors, and currently more formally understand the consequences of this global oil shock? Click this hot link:
The macro modeling exercise was undertaken by Lutz Kilian, Michael D. Plante, Alexander W. Richter and Xiaoqing Zhou of the Dallas Fed.
I. An Introduction to Macro Oil Shock Modeling
“The outbreak of the Iran War in February 2026 caused a major disruption to oil trade and resulted in a surge in oil prices, which was quickly reflected in higher retail gasoline prices.”
“A question of great interest to policymakers and market participants is to what extent recent and future retail gasoline price increases driven by this geopolitical event will raise headline and possibly core inflation.”
“There is also concern that these gasoline price increases may raise household inflation expectations, amplifying the direct impact of higher gasoline prices.”
“Interest in this question surged in late March 2026.”
“For example, political observers highlighted how E.U. central bankers are agonizing over how to respond to the inflationary pressures caused by the Iran War.”
“Similarly, Federal Reserve officials expressed concern about a short-term increase in inflation stemming from rising energy prices, and the International Monetary Fund warned that ‘if prolonged, higher energy prices will lead to higher headline inflation.’
“We study this inflationary impact based on U.S. data available at the end of March 2026, reflecting the real-time data constraints faced by policymakers.”
“Our analysis helps assess the impact on U.S. inflation under a range of alternative scenarios that could play out in the future.”
MODELING THE IMPACT OF GEOPOLITICAL OIL SUPPLY DISRUPTIONS
“In March 2026, the WTI price of oil increased from about $60 per barrel in late January, before military action was anticipated, to $91 per barrel on average, alongside broad-based increases in refined product prices (e.g., gasoline, diesel, and jet fuel).”
“In our baseline specification, the magnitude of the geopolitical oil production disruption is set to 20% of global oil production (ζe = 0.2), corresponding to a cessation of all oil exports from the Persian Gulf.”
“The expected duration of this disruption is set to 3 quarters (q¯e = 0.67), matching the length of the disruption that followed the Arab-Israeli War in 1973.”
“The subsequent effects depend on when oil shipments resume.”
“For example, if the Strait reopens after one quarter, the oil price drops to $71 per barrel in quarter 2.”
“When the oil supply shortfall lasts longer than one quarter, richer dynamics arise.”
Extending the closure to two quarters causes the oil price to rise further to $132 per barrel in Q2 before falling to $85 per barrel in Q3.
If shipping resumes after three quarters, the oil price will rise even further before declining, reaching $167 per barrel in Q3.
“Taking into consideration the path of oil and gasoline prices in each case, the model predicts that closing the Strait of Hormuz for 1, 2, or 3 quarters would increase Q4/Q4 headline PCE inflation in 2026 by 0.35, 0.79 and 1.47 percentage points, respectively.”
“The corresponding effect on core PCE inflation would only be 0.18 percentage points if the closure ends after one quarter.”
“But would rise to 0.31 and 0.49 percentage points if the closure persists for two or three quarters, suggesting potentially sizable effects on core inflation.”
The massive implication: The FOMC would be forced to raise their policy rate, if there indeed is a 0.5% rise in the U.S. core PCE inflation rate.
Note that Info Tech and Energy now lead our list at “Very Attractive." That forced S&P500 sector ranking screams “AI cap-ex buildout” and “Global oil shock.”
Read on to find the large-cap stock picks in Zacks #1 Rank list to play for aligning with that earnings out-performance.
II. Zacks May 2026 Sector/Industry/Company Telescope
April 30th, 2026 data showed Info Tech remained dominant at Very Attractive. Semiconductor EPS growth stays aloft via “AI” chips. Electronics looks great.
Energy stayed Very Attractive rating; Iran plays a major factor.
Utilities fell to Attractive, as Nat Gas Distributors led. Communication Services fell to Attractive from Very Attractive. The “AI” Telco Equipment group ranked very high.
Financials stayed Market Weight. Rising global recession risk, a private credit debacle, and possible Fed rate hikes downshifted the momentum here.
Industrials stayed at a Market Weight rating. Metal Fabricating and Pollution Control took the lead in that sector.
Health Care stayed on a Market Weight group too.
Materials remained at an Unattractive rating.
The big move up?
Consumer Staples and Consumer Discretionary rose to Market Weights, from Unattractive ratings.
The Forced Ranking:
(1) Info Tech stays Very Attractive. Semis, Electronics, & Computer-Office led. A Zacks #1 Rank (STRONG BUY) Large Cap Stock: Micron (MU - Free Report)
(2) Energy stays Very Attractive. Oil & Gas Integrated, Oil Miscellaneous, and Oil E&P led the way. A Zacks #1 Rank (STRONG BUY) Large Cap Stock: Exxon Mobil (XOM - Free Report)
(3) Utilities fell to Attractive from Very Attractive. Utility-Gas Distribution best. A Zacks #1 Rank (STRONG BUY) Large Cap Stock: RWE AG (RWEOY - Free Report) Note: RWE AG is among Europe's five largest utilities.
(4) Communications Services fell to Attractive from Very Attractive. Telco Equipment stayed strong, once again. It is an “AI” group.
(5) Industrials stayed Market Weight. Metal Fabricating, and Pollution Control looked the best.
(6) Financials stayed Market Weight. Real Estate, Finance, and Investment Banking & Brokering looked best.
(7) Health Care stayed at Market Weight. Drugs and Medical Care looked best.
(8) Consumer Staples rose to Market Weight from Unattractive. Agri-business and Food/Drug Retail looked the best.
(9) Consumer Discretionary rose to Market Weight from Unattractive. Consumer Electronics looked the best.
(10) Materials stayed Unattractive. Building Products looked OK.
Now, let’s wrap it out, and see what oil industry execs think.
III. Conclusion
The Dallas Fed views the 3-quarter shock as a plausible "stressed" baseline. It represents a world where oil hits $167, gasoline likely exceeds $5.00/gal nationally, and core inflation is dragged upward by nearly half a percent.
Will a three-quarter long global oil shock really happen?
While the working paper provides the mathematical analysis, the Dallas Fed's Energy Survey (April 2026 Update) provides the "market" probability -- based on responses from 120 oil and gas executives:
26% Probability: Executives specifically expect the disruption to last until November 2026 (3 quarters).
14% Probability: Executives expect the disruption to last longer than 3 quarters. Their Aggregated Probability?
Collectively, oil and gas industry experts currently assign a 40% probability -- to a global oil shock lasting 3 quarters, or more.
That probability is dynamic.
That’s it for me.
Enjoy the rest of my Zack May 2026 Market Strategy report.
Best Regards,
John Blank, PhD. Zacks Chief Equity Strategist and Economist
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View the Zacks #1 Rank List
Global Oil Shock Modeling: Zacks May Market Strategy
The following is an excerpt from Zacks Chief Strategist John Blank’s full May Market Strategy report To access the full PDF, click here.
To explore a critical macro subject for investors, and currently more formally understand the consequences of this global oil shock? Click this hot link:
“The Impact of the 2026 Iran War on U.S. Inflation: A Scenario Analysis”
It was published in April 2026.
The macro modeling exercise was undertaken by Lutz Kilian, Michael D. Plante, Alexander W. Richter and Xiaoqing Zhou of the Dallas Fed.
I. An Introduction to Macro Oil Shock Modeling
“The outbreak of the Iran War in February 2026 caused a major disruption to oil trade and resulted in a surge in oil prices, which was quickly reflected in higher retail gasoline prices.”
“A question of great interest to policymakers and market participants is to what extent recent and future retail gasoline price increases driven by this geopolitical event will raise headline and possibly core inflation.”
“There is also concern that these gasoline price increases may raise household inflation expectations, amplifying the direct impact of higher gasoline prices.”
“Interest in this question surged in late March 2026.”
“For example, political observers highlighted how E.U. central bankers are agonizing over how to respond to the inflationary pressures caused by the Iran War.”
“Similarly, Federal Reserve officials expressed concern about a short-term increase in inflation stemming from rising energy prices, and the International Monetary Fund warned that ‘if prolonged, higher energy prices will lead to higher headline inflation.’
“We study this inflationary impact based on U.S. data available at the end of March 2026, reflecting the real-time data constraints faced by policymakers.”
“Our analysis helps assess the impact on U.S. inflation under a range of alternative scenarios that could play out in the future.”
MODELING THE IMPACT OF GEOPOLITICAL OIL SUPPLY DISRUPTIONS
“In March 2026, the WTI price of oil increased from about $60 per barrel in late January, before military action was anticipated, to $91 per barrel on average, alongside broad-based increases in refined product prices (e.g., gasoline, diesel, and jet fuel).”
“In our baseline specification, the magnitude of the geopolitical oil production disruption is set to 20% of global oil production (ζe = 0.2), corresponding to a cessation of all oil exports from the Persian Gulf.”
“The expected duration of this disruption is set to 3 quarters (q¯e = 0.67), matching the length of the disruption that followed the Arab-Israeli War in 1973.”
“The subsequent effects depend on when oil shipments resume.”
“For example, if the Strait reopens after one quarter, the oil price drops to $71 per barrel in quarter 2.”
“When the oil supply shortfall lasts longer than one quarter, richer dynamics arise.”
Extending the closure to two quarters causes the oil price to rise further to $132 per barrel in Q2 before falling to $85 per barrel in Q3.
If shipping resumes after three quarters, the oil price will rise even further before declining, reaching $167 per barrel in Q3.
“Taking into consideration the path of oil and gasoline prices in each case, the model predicts that closing the Strait of Hormuz for 1, 2, or 3 quarters would increase Q4/Q4 headline PCE inflation in 2026 by 0.35, 0.79 and 1.47 percentage points, respectively.”
“The corresponding effect on core PCE inflation would only be 0.18 percentage points if the closure ends after one quarter.”
“But would rise to 0.31 and 0.49 percentage points if the closure persists for two or three quarters, suggesting potentially sizable effects on core inflation.”
The massive implication: The FOMC would be forced to raise their policy rate, if there indeed is a 0.5% rise in the U.S. core PCE inflation rate.
Note that Info Tech and Energy now lead our list at “Very Attractive." That forced S&P500 sector ranking screams “AI cap-ex buildout” and “Global oil shock.”
Read on to find the large-cap stock picks in Zacks #1 Rank list to play for aligning with that earnings out-performance.
II. Zacks May 2026 Sector/Industry/Company Telescope
April 30th, 2026 data showed Info Tech remained dominant at Very Attractive. Semiconductor EPS growth stays aloft via “AI” chips. Electronics looks great.
Energy stayed Very Attractive rating; Iran plays a major factor.
Utilities fell to Attractive, as Nat Gas Distributors led. Communication Services fell to Attractive from Very Attractive. The “AI” Telco Equipment group ranked very high.
Financials stayed Market Weight. Rising global recession risk, a private credit debacle, and possible Fed rate hikes downshifted the momentum here.
Industrials stayed at a Market Weight rating. Metal Fabricating and Pollution Control took the lead in that sector.
Health Care stayed on a Market Weight group too.
Materials remained at an Unattractive rating.
The big move up?
Consumer Staples and Consumer Discretionary rose to Market Weights, from Unattractive ratings.
The Forced Ranking:
(1) Info Tech stays Very Attractive. Semis, Electronics, & Computer-Office led.
A Zacks #1 Rank (STRONG BUY) Large Cap Stock: Micron (MU - Free Report)
(2) Energy stays Very Attractive. Oil & Gas Integrated, Oil Miscellaneous, and Oil E&P led the way. A Zacks #1 Rank (STRONG BUY) Large Cap Stock: Exxon Mobil (XOM - Free Report)
(3) Utilities fell to Attractive from Very Attractive. Utility-Gas Distribution best.
A Zacks #1 Rank (STRONG BUY) Large Cap Stock: RWE AG (RWEOY - Free Report)
Note: RWE AG is among Europe's five largest utilities.
(4) Communications Services fell to Attractive from Very Attractive. Telco Equipment stayed strong, once again. It is an “AI” group.
(5) Industrials stayed Market Weight. Metal Fabricating, and Pollution Control looked the best.
(6) Financials stayed Market Weight. Real Estate, Finance, and Investment Banking & Brokering looked best.
(7) Health Care stayed at Market Weight. Drugs and Medical Care looked best.
(8) Consumer Staples rose to Market Weight from Unattractive. Agri-business and Food/Drug Retail looked the best.
(9) Consumer Discretionary rose to Market Weight from Unattractive. Consumer Electronics looked the best.
(10) Materials stayed Unattractive. Building Products looked OK.
Now, let’s wrap it out, and see what oil industry execs think.
III. Conclusion
The Dallas Fed views the 3-quarter shock as a plausible "stressed" baseline.
It represents a world where oil hits $167, gasoline likely exceeds $5.00/gal nationally, and core inflation is dragged upward by nearly half a percent.
Will a three-quarter long global oil shock really happen?
While the working paper provides the mathematical analysis, the Dallas Fed's Energy Survey (April 2026 Update) provides the "market" probability -- based on responses from 120 oil and gas executives:
26% Probability: Executives specifically expect the disruption to last until November 2026 (3 quarters).
14% Probability: Executives expect the disruption to last longer than 3 quarters.
Their Aggregated Probability?
Collectively, oil and gas industry experts currently assign a 40% probability -- to a global oil shock lasting 3 quarters, or more.
That probability is dynamic.
That’s it for me.
Enjoy the rest of my Zack May 2026 Market Strategy report.
Best Regards,
John Blank, PhD.
Zacks Chief Equity Strategist and Economist