ADB warns of persistent shocks from Middle East conflict

MANILA, Philippines — The Asian Development Bank is now warning of a persistent shock to energy markets, with prices remaining above pre-conflict levels for an extended period. The Manila-based multinational organization has issued an updated analysis of the impact of the Middle East conflict on Asia and the Pacific.

The Philippines is specifically part of the Developing Southeast Asia (DSA) countries for which the ADB has now downgraded its 2026 growth projection to 4.2 percent, 0.5 percentage points lower than the early stabilization scenario which had projected a growth of 4.7 percent for this year. Inflation is also projected higher at 4.5 percent this year.

The downgrade extends to 2027, for which the growth projection for the DSA countries has been adjusted downward to 4.1 percent from the ADB’s earlier stabilization scenario of 4.8 percent. Inflation under the updated analysis would drop to 3.6 percent.

Of more concern though, the ADB has also drawn up a severe downside scenario for 2026 and 2027 which projects an even lower growth of 3.6 percent for DSA this year and a further economic growth deterioration of 2.7 percent in 2027. Inflation forecast has been raised to 6.4 percent this year before easing to 5.1 percent in 2027.ADB did not release individual country growth projections.

The ADB explained that it had to update its projections after taking into account physical damage to energy production and processing facilities that will likely to weigh on supply for an extended period, as repairing some of the damage could take multiple quarters or even years, based on studies of the International Energy Agency or IEA.

The ADB analysts also noted that the end of military action would not immediately eliminate security risks

to maritime transit through the Strait of Hormuz. Thus, as long as the risks remain elevated, insurers will demand higher premia, and shipping will remain slower and more costly, sustaining upward pressure on delivered energy prices.

Consistent with these assessments, the updated ADB analysis pointed out that market expectations point to only a gradual normalization. Although oil prices are expected to decline from current spot levels, futures curves remain well above pre-conflict levels, indicating that the prevailing expectation is of persistently tighter conditions.

The key points of the updated analysis acknowledge that prolonged disruptions to energy transport and infrastructure in the Middle East point to more persistent supply constraints than anticipated in March 2026, potentially leading to structurally higher energy prices.

The energy shock, the ADB explained, is feeding through to consumers, with fuel prices rising across most of Asia and the Pacific. Surging fertilizer prices, it warned, could add to food inflation, particularly for economies most dependent on imports from the Middle East.

Under the new reference scenario, assuming persistent energy supply disruptions and only a gradual easing of market tightness, growth in developing Asia and the Pacific is projected to slow to 4.7 percent and inflation to rise to 5.2 percent in 2026. This compares with projections of 5.1 percent growth and 3.6 percent inflation under the early stabilization scenario in the Asian Development Outlook April 2026.

Policy responses in Asia and the Pacific, the ADB said, have so far relied on price controls, fuel subsidies and excise tax cuts. These measures, the ADB noted, offer short-term relief but are fiscally costly and distort incentives. Targeted support to vulnerable households would preserve price signals and safeguard fiscal space.

The ADB brief released this week presents two updated scenarios that explicitly incorporate persistent disruptions and a slower normalization of energy markets. The reference scenario reflects recent market price expectations, adjusted upward to account for a sluggish normalization of energy supply conditions. The severe downside scenario assumes a severe escalation and is intended as a stress test to assess the implications of a substantial deterioration relative to the reference scenario.

The reference scenario assumes that the physical oil price averages around $96 per barrel in 2026, before easing to around $80 in 2027. These figures are substantially larger relative to the pre-conflict average of $69 over January and February 2026, as well as to the early stabilization scenario assumed in ADB (2026).

Furthermore, the updated ADB brief said, underlying these annual averages is a spike to $116 on average in April 2026, followed by a gradual decline to $77 in December 2027. The assumed path reflects futures prices observed between April 1 and 20, but is adjusted upward to account for the gap that has emerged between physical delivery prices and paper market benchmarks. This adjustment is critical, the brief said, since the onset of the conflict, futures prices have become a less reliable guide to the effective cost of energy faced by importers, as they do not fully capture constraints on physical delivery — particularly those arising from disruptions to transit through the Strait of Hormuz.

Effective supply conditions, the ADB emphasized, are assumed to remain tighter than implied by futures markets alone. The scenario incorporates a persistent premium of physical over futures prices, which narrows only gradually. As a result, even without further escalation, energy costs stay elevated for longer. Consistent with this, the assumed path for physical oil prices over 2026 and 2027 lies systematically above pre-conflict assumptions, remaining about $16 per barrel higher by December 2027.

The assumed oil price trajectory also lies above recent projections by institutions such as the US Energy Information Administration (EIA, 2026) and the International Monetary Fund (IMF, 2026).

Additionally, the ADB analysis showed, natural gas prices in Asia and Europe are assumed to peak in the second quarter of 2026 and remain above the early stabilization scenario path through 2026 and 2027. Prices peak at just below $30 per million British thermal units, from just above $10 per million BTU before Feb 28.

It was also explained that the analysis took into account that food prices also stay above those implied by the early stabilization scenario over the forecast horizon, reflecting both higher diesel prices and disruptions to fertilizer markets.