Emerging Markets Tank 2% on Oil Shock

The recent surge in oil prices saw Brent crude futures touch their highest level since July 2024, briefly exceeding $85 a barrel. Analysts at J.P. Morgan and Bernstein now anticipate prices could surpass the $100 mark if the conflict in the Middle East continues to disrupt crucial shipping routes like the Strait of Hormuz. This volatility is fueling a flight to safety, with the yield on the 10-year U.S. Treasury note climbing to 4.12% as investors seek stability. Historically, oil price shocks driven by supply concerns tend to negatively impact emerging market corporate bonds, whereas shocks from global demand can sometimes attract investors looking for higher yields. For India, the economic stakes are particularly high as over 40% of its crude imports pass through the Strait of Hormuz. Every $10 per barrel increase in crude prices is estimated to add between $13-14 billion to the nation's annual import bill, which could widen the current account deficit by as much as 0.5% of GDP. Sri Lanka's stock market registered its most significant single-day drop since its 2022 financial crisis, a direct response to the oil shock. The nation remains economically fragile, operating under a $2.9 billion IMF bailout program, and the renewed specter of fuel queues has revived memories of the severe shortages that marked the 2022 crisis. The country's reliance on the Middle East extends beyond oil; it is a major destination for Sri Lankan tea exports, and remittances from nearly a million Sri Lankans working in the region totaled approximately $8 billion in 2025. In Bangladesh, where almost all fuel oil is imported, the shock threatens to worsen already high inflation, which reached 8.58% in January 2026. This has created fears of a repeat of the 2022 energy crisis when soaring LNG prices led to widespread power shortages.