EM Blog: EM FX: running out of energy?

Research evidence excerpt

EM Blog: EM FX: running out of energy?

Deutsche Bank

Research

Global Emerging Markets Date

Middle East 23 July 2026

EM Blog

EM FX: running out of energy?

Oliver Harvey

The resurgence in oil prices since the breakdown in negotiations between Iran and

Macro Strategist

the United States earlier this month are threatening to derail a solid outlook for +44-20-754-51947

emerging market returns that we argued for in our outlook. Up until now, the effect

of the crisis in the Gulf on emerging market macro has been relatively limited, but

that doesn't mean markets should be complacent. We make three observations.

First, in terms of oil, the widening of the conflict into an apparent Houthi economic

blockade of the Bab el-Mandeb strait does carry risks. A significant amount of Saudi

oil has been rerouted away from the eastern Gulf towards alternative Red Sea routes

and Egypt. While blockading the strait itself is unlikely to cut off Saudi supply, an

intensification of the conflict that saw Saudi port or pipeline facilities directly

targeted could do so. This would also have material implications for Egypt which

relies on Suez Canal revenue. Although its revenue stream remains close to half that

prior to Houthi attacks after 2023, it has been able to rely on the transit of ships

unaligned to Israel, including Saudi ones or those carrying Saudi oil (figure 1). So far

the reaction in both EGP and implied yields has been muted.

Second, one of the reasons global markets were able to weather the shock earlier

this year was the drawdown in reserves. According to some estimates, US strategic

reserves have reached the lowest level since 1983 and the ongoing widening in

crack spreads could suggest increasing pressure in this respect (see our energy

strategist's chartpack).