The interim US-Iran peace deal is being tested with the recent exchange of strikes. UBS expects a rebound in oil prices as markets overestimate the speed of traffic recovery.
The US and Iran have exchanged fresh strikes despite having signed an interim deal earlier this month. Both sides have accused each other of breaching the ceasefire with reported attacks in Kuwait, Bahrain, and southern Iran. Within the Strait of Hormuz, a Singapore-flagged vessel was also hit during passage by a suspected drone.
For investors, the renewed tensions not only test the sustainability of peace but also the outlook for energy markets. According to a note by UBS, “oil’s path is not a one-way Strait”, with current prices – around USD72 per barrel (bbl) of Brent crude – reflecting several factors, including excessive optimism.
Declining prices before the deal
UBS highlighted that the steady decline in oil prices had already started around mid-May before the latest deal was signed. Drivers included China’s consumption of its own strategic inventories, record US exports, and Saudi Arabia and the UAE’s use of their pipelines to bypass the Strait of Hormuz.
“But while we have lowered our oil forecasts to reflect the reopening of the Strait of Hormuz, we believe the current price level overestimates how quickly traffic through the waterway will normalise and shut-in production will recover. We expect Brent crude to return to USD85/bbl by the end of this year,” UBS said.
Shipping confidence
Ultimately, a complete rebound in waterway traffic will be key and UBS believe this will take time. In addition to geopolitical risks, there is also a reduced number of vessels that can travel through the Strait due to new post-conflict routes and production recovery is likely to be slower than anticipated because of diverted tankers.
“Iran has not claimed responsibility for the latest episode, but the incident follows a warning from Iran’s Revolutionary Guard against ships using “unauthorised” routes. The UN’s maritime agency, meanwhile, said it would pause its evacuation plans for ships stuck in the Strait of Hormuz,” UBS added.
“We believe it will take time for shipping confidence to return fully, including safety assurances and mine clearance to allow insurance premiums to normalise. In our view, only when such confidence is re-established will there be a meaningful uptick in inbound ships loading oil for exports.”
UBS is advising investors to consider energy as a buffer against supply disruptions, with El Niño-related risks potentially supporting agricultural commodities, and AI and electrification remaining positive for industrial metals.
