Fifty shades of complexity
233 Monday, 16 June 2025 11:06
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Oil prices have returned to centre stage in markets following Israel’s strikes on Iran last week, adding a fresh layer of uncertainty to stagflationary risks. A prolonged rally in oil prices could indeed translate into renewed concerns over supply-driven price pressures, especially in the context of higher tariffs, and it could be another factor ultimately hampering global growth.
So far, minimal energy infrastructure impacts. The three-day war between Israel and Iran has, so far, left critical energy infrastructure unharmed. Israel did not target any oil fields or oil export terminals. However, following a strike, a fire broke out in a gas processing unit at Iran’s giant South Pars natural gas field, shutting down around 12mcm of gas (out of 275mcm capacity). South-Pars production is for domestic use. There were also reports of insurance companies’ reluctance to let ships pass through the Strait of Hormouz.
Still, we cannot rule out a more disruptive reaction from Iran than ever before, given the unprecedented scale and diversity of Israel’s recent attack. Iran’s disruptive capabilities lie largely outside the battlefield, including proxy activity (notably Shia militias that could destabilize Iraq) and strategic leverage over the Strait of Hormuz, a key maritime chokepoint. If Iran were to block oil/gas exports along the Strait, this would be the worst-case scenario for investors, and it could quickly lead to the prospect of recessionary scenarios. Around 20-21mb/d of crude oil, condensates, and products flow through the Strait of Hormuz, which represents c. 20% of global oil consumption.
However, the odds of a worst-case scenario are low, in our view, as:
- Closing the Strait of Hormuz is a red line that has never been crossed in the past.
- Iran is also not in a position of strength, with its proxies hit in the aftermath of the situation in Gaza – Hezbollah in Lebanon and the Houthis in Yemen (targeted by the US).
- We should remember that a sharp rise in oil prices could prompt the US to step in, given Trump’s commitment to lowering energy prices. We note that over the weekend Trump has been pressuring Iran to come to the negotiating table.
- In parallel, Saudi Arabia could rapidly boost supply (capacity to add 3mb/d), especially in a scenario where Iranian supply (1.5mb/d of exports) would be disrupted. Moreover, the projected path for oil supply pointed towards a heavy market oversupply by Q4 (Netanyahu might have seized this “now or never” opportunity).
We explore the potential market implications should the situation worsen or last:
- From a cross-asset perspective, a dramatic escalation would trigger a risk-off move, favouring fixed income and pressuring the global stock market after a big rally. Finally, commodities and gold naturally serves as a hedge against geopolitical tensions.
- Within European equities, we look at the sensitivity of the various sectors to negative oil supply shocks over the past ten years, and highlight that Energy, Basic Resources, Financials, Telecoms and Food & Beverages typically outperform, while Tech and Luxury Goods would likely be the most penalised.
- In the meantime, due to the uncertainty, we reiterate our defensive stance in European equities, with notably a Strong OW on the Telecoms sector, which screens as relatively immune to negative oil supply shocks. The expectation of a lower oil price is underpinning some of our ratings (ex: OW rating on Travel & Leisure and Chemicals sectors, and a positive stance on European Small & Mid caps), but we stick to the above factors of resilience.
- Amid the risk of an escalation in the Middle East, we highlight that US defence stocks look more appealing than their European peers on valuation grounds.
While a sustained increase in oil prices would constitute another stagflationary risk, along with rising trade tensions, it is worth noting that, so far, the impact of higher tariffs on US prices has been surprisingly contained, as was shown by last week’s CPI and PPI reports.
Despite this, however, we expect the Fed to stick to its wait-and-see stance at this week’s FOMC meeting. After all, while the pass-through of higher tariffs to consumer prices has hitherto been extremely limited, it would be premature to conclude that things will stay that way over the coming months. In particular, it is possible that the inventories built up by firms in anticipation of the tariffs have been acting as a buffer so far. However, if this is the case, firms may ultimately be forced to raise their prices. Either way, with uncertainty surrounding the macro outlook still very high, the Fed will be happy to stay put and will take care of retaining full optionality for future decisions.
Week ahead: in the run-up to the FOMC meeting, US retail sales for May will be an important datapoint. Outside the US, the nationwide CPI and the BoJ meeting in Japan will be also closely watched by global investors. In the UK, the BoE will hold its regular monetary policy meeting and is not expected to change policy rates.
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