UBS analysts have warned that sustained shipping disruptions through the Strait of Hormuz, driven by ongoing fighting in the Middle East, could send oil prices past $90 per barrel. The analysts, including Mark Haefele and Giovanni Staunovo, said current price levels do not represent a "stable equilibrium" and that further damage to shipping or energy infrastructure would likely push prices higher.
Crude was tracking notable weekly gains as traders weigh the risk that hostilities between Iran and allied U.S.-Israeli forces could effectively close the Strait of Hormuz - the narrow waterway through which roughly 20% of the world's oil supply transits. Concern over reduced flows has been a primary driver of recent price strength.
To temper market stress, the United States announced a temporary measure allowing the sale of Russian oil to India for a 30-day period. In addition, the U.S. Treasury Department is expected to introduce steps aimed at corralling energy prices via financial markets, according to media reports.
In their note, the UBS team cautioned that if shipping disruptions persist or if energy infrastructure sustains additional damage, benchmark crude could rise markedly with the potential to exceed $90 per barrel. They stressed, however, that prices would need to remain elevated for several months before materially affecting broad growth or inflation outcomes.
Market participants are already signaling concern about the potential economic effects. The prospect of higher gasoline prices in the United States has triggered worries that prolonged supply tightness could boost inflationary pressures and delay the timeline for prospective Federal Reserve interest rate cuts later in the year. U.S. bond yields have risen amid these concerns, weighing on equities.
UBS analysts noted that if hostilities were to end, oil markets would likely ease, with Brent crude drifting back into a $60 per barrel to $70 per barrel range. At present, however, there are limited signs of de-escalation.
Recent reports indicate that Israel struck Hezbollah targets in Lebanon and carried out strikes directed toward Tehran on Friday, while Iran's Islamic Revolutionary Guard Corps launched a barrage of drones and missiles at Tel Aviv. Those rounds of action underscore the continued potential for disruptions to shipping and energy infrastructure.
Summary
- UBS warns extended disruptions through the Strait of Hormuz could lift oil beyond $90/bbl.
- U.S. actions - a 30-day allowance for Russian oil sales to India and anticipated Treasury measures - aim to reduce near-term market volatility.
- Analysts say elevated prices must persist for months to materially alter growth or inflation forecasts; a cessation of hostilities could return Brent to the $60-70/bbl range.