LONDON, April 18 (Reuters) - Oil prices are up around

16% so far this year near $90 a barrel, with supply worries high

given escalating Middle East tensions and tit-for-tat attacks on

energy infrastructure between Ukraine and Russia.

Investors are paying attention. After all, it was an energy

price surge two years ago that helped drive inflation and

interest rates higher on a scale not seen in decades.

The International Monetary Fund on Tuesday described an

"adverse scenario" in which an escalation of conflict in the

Middle East would lead to a 15% jump in oil prices and higher

shipping costs that would hike global inflation by about 0.7

percentage points.

The tightness in oil supplies, and higher prices, has been

underpinned by oil producing group OPEC and other big oil

producers curbing their output.

Morgan Stanley has lifted its third quarter Brent crude oil

forecast by $4 per barrel to $94. With oil prices

expected to stay high, we look at the fallout for world markets.

1/ INFLATION WATCH

After U.S. inflation came in higher than expected for a

third straight month in March, the spectre of inflation staying

higher has returned with bets on interest rate cuts scaled back

sharply.

Softening energy prices have been a principal driver of

lower inflation expectations recently. Higher oil prices are

seen as a threat to this trend.

A key market gauge of long-term euro zone inflation

expectations, which generally track oil, on Tuesday hit its

highest since December at 2.39%. The European

Central Bank has a 2% inflation target.

ECB chief Christine Lagarde said on Tuesday fresh turbulence

in the Middle East had so far had little impact on commodity

prices. Oil, while near recent highs, has eased a little this

week.

Still, the ECB has said it is "very attentive" to the impact

of oil, which can hurt economic growth and boost inflation.

Zurich Insurance Group chief markets strategist Guy Miller

said economies can survive, and producers are reasonably happy,

when oil is around $75-$95 a barrel.

"But were we to see this to break higher then, yes, that

would be a concern both from a growth and inflation

perspective," he said.

2/ GO ENERGY STOCKS

Energy stocks are a clear winner from higher oil prices. The

S&P 500 oil index and European oil and gas stocks

remain close to record highs.

U.S. oil stocks have jumped almost 13% so far this

year, outperforming the broader S&P 500's 6% gain.

Ed Yardeni, founder of Yardeni Research, said a rise in

Brent crude to $100 in coming weeks was a possibility,

recommending an "overweight" position on energy stocks.

Oil was last above $100 in 2022. It briefly spiked to around

$139 after Russia invaded Ukraine, its highest since 2008.

"I believe you have to overweight energy as at least a shock

absorber in your portfolio in the event that oil prices continue

to go higher," said Yardeni.

Barclays head of European equity strategy Emmanuel Cau has

had an overweight position on Europe's energy stocks since

October, saying the sector tends to perform well in inflationary

and stagflationary environments.

In contrast, Nordea CIO Kasper Elmgreen said he was negative

on energy stocks because the costs associated with an energy

transition were not correctly priced yet.

"They (energy firms) are going to have to carry a much

higher burden for the drive to net zero, and that's not being

reflected in the share price," said Elmgreen.

3/ ROBUST DOLLAR

2024 kicked off with expectations the dollar would decline

as inflation weakens and allows the Federal Reserve to start

cutting rates.

Instead, the greenback is up 4.7% this year as

rate-cut bets are slashed.

Higher oil prices could feed dollar strength.

Bank of America said that while it remained negative on the

dollar over the medium term, elevated oil prices meant the U.S.

currency had "upside risks".

That exacerbates pressure on economies such as Japan

battling currency weakness, keeping traders nervy over possible

intervention to support a yen languishing at 34-year lows.

"The yen and the euro will see their terms of trade worsen

as energy prices rise. This implies they will be weaker if

energy prices rise," said Mizuho Corporate Bank senior economist

Colin Asher.

4/ FRESH EM PAIN

Higher for longer oil prices will also sting many emerging

market economies, such as India and Turkey, that are net oil

importers.

India's rupee hit record lows against the dollar this week

.

With oil priced in dollars, many importers are also exposed

to higher prices caused by currency fluctuations.

Even in Nigeria, typically Africa's largest oil exporter, a

plunging naira currency has hit government coffers due to capped

gasoline pump prices and a lack of local oil refining.

(Additional reporting by Natalie Grover, Libby George and

Amanda Cooper; Graphics by Kripa Jayaram, Prinz Magtulis, Vineet

Sachdev, Riddhima Talwan; Editing by Dhara Ranasinghe and Mark

Potter)