El Nino's coming back - and could cost the global economy trillions

By Nora Redmond

Citigroup sees Brent prices averaging about $75 in the second half of the year.

In a week in which oil prices recovered toward levels not seen since before the start of the war in Iran, Citigroup warns that another supply shock may be looming.

"While one supply shock is abating, another one may be around the corner," economists at the New York-based investment bank, led by Nathan Sheets, wrote in a note on Thursday.

An El Niño could have "damaging effects for years to come" on the global economy through disruptions to agriculture, infrastructure and productivity, Citigroup found. An El Niño is the warm phase of the El Niño-Southern Oscillation (ENSO) weather pattern in the tropical Pacific Ocean. It leads to higher temperatures and heavy rainfall and boosts the risk of drought in much of North America, South America, Asia, Africa and Australia.

"Historically, these cycles have resulted in substantial economic losses," they wrote, adding that academics estimated the 1997-98 event costing approximately $5.7 trillion, marking it as "the most economically destructive" El Niño ever recorded.

The U.S. National Oceanic and Atmospheric Administration (NOAA) is predicting a more than 95% chance of an El Niño starting in the second quarter and continuing until March of next year, with a probability of 63% of a "very strong" one occurring by the end of 2026.

The economists said that in their base case, a strong event entails losses of between $3 trillion and $5 trillion across five years, or about 2.7% to 3.2% of global gross domestic product. In a super El Niño scenario, losses could reach as high as $7 trillion, representing 6.4% of GDP.

They said the global economy has faced a number of headwinds, like tariff policies, aging populations and slowing productivity growth. But one of the most recent - the energy shock driven by the closure of the Strait of Hormuz during the conflict in the Middle East - is hopefully showing signs of abating.

"The performance of risk assets and energy markets in recent days portends a turning point in the Middle East conflict," the economists wrote. With a preliminary memorandum of understanding triggering a 60-day period for negotiations between the U.S. and Iran, the health of the global economy is no longer hinged on price swings, they added. While the economists forecast Brent prices (BRN00) averaging about $75 a barrel in the second half of the year, $15 higher than expected before the war, they noted that the current framework allows Tehran to significantly boost its oil exports.

-Nora Redmond

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-26-26 0929ET