According to analysis, Benjamin Jones, Global Head of Research at Invesco, stated that shipping activity in the Strait of Hormuz remains the core focus, with the number of vessels passing through being the most critical data point. Markets are increasingly pricing in the expectation that shipping disruptions could last longer. Overall, markets are digesting short-term disruptions. If trade through the Strait of Hormuz does not approach full restoration and a substantive peace agreement is not reached in the near term, Invesco maintains its view that the lower bound for the front-month Brent crude contract this year is around $80 per barrel; however, market performance has been more positive than previously anticipated. Furthermore, the realignment of energy flows has been faster and stronger than expected, but the geopolitical risk premium is expected to persist for some time.
Jones noted that the Middle East conflict has lasted two months, and a US-Iran ceasefire agreement was extended at the last minute, aligning with Invesco's baseline scenario. However, even if the ceasefire holds, shipping traffic through the Strait of Hormuz has not improved over the past week. There are indications that crude oil exports from the region are exceeding initial expectations, primarily via Saudi Arabia's East-West Pipeline (with a capacity of approximately 7 million barrels per day) and the UAE's Habshan-Fujairah pipeline (ADCOP, with a capacity of about 1.5 to 1.8 million barrels per day). With expanded flows, it is understood these pipelines have now reached their maximum operational limits.
Prior to the conflict, roughly 15 million barrels of crude oil per day transited the Strait of Hormuz, implying a current supply shortfall of approximately 6 million barrels per day, not including other petroleum products. The global economy is addressing the shortfall in oil and related products through measures like demand reduction and strategic stockpile releases, thereby partially alleviating the supply-demand imbalance. While this provides minor relief for overall oil consumption, it is important to note this situation does not account for other goods typically shipped through the Strait, such as helium, aluminum, and sulphur, for which there are no alternative transport routes.
Major central banks are expected to keep policy rates unchanged this week, with market pricing also reflecting expectations for steady rates. Markets still anticipate the Bank of England and the European Central Bank will hike rates at subsequent meetings, but Invesco leans towards the view that this may not occur, as inflation expectations remain anchored and the current shock appears to be supply-side driven. Invesco maintains a positive outlook on equities, with a preference for non-US markets, and expects the US dollar to weaken by year-end. However, given rapidly changing market conditions, investment positioning should prioritize caution rather than over-reliance on any single perspective.
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