Markets are mispricing energy risk, strategist warns of looming inflation shock

• Financial oil markets are underpricing physical oil market realities, potentially due to over-optimism about an Iran-U.S. peace deal and the opening of the Straits of Hormuz.
• Current oil prices (starting at $60, now near $100 for Brent) are already causing an inflation shock of 1.5-3%, spreading beyond direct energy costs to services.
• Central banks will likely react divergently: the Fed may prioritize labor markets, the ECB will likely raise rates, and the Bank of Japan may remain inactive, potentially leading to a prolonged inflationary spiral.

David Roche of Quantum Strategy argues that financial oil markets are mispricing energy risk by overestimating the chances of an Iran-U.S. peace deal. He warns of an imminent global inflation shock, driven by current high oil prices (which he believes are understated by financial markets) and their spread to other sectors, exacerbated by divergent central bank responses.