Market pricing remains significantly inadequate for a protracted Middle East conflict. A prolonged closure of the Strait of Hormuz could drive crude oil prices above $150 per barrel by the end of April, potentially pushing US inflation near 5%. Global equity markets would likely follow historical patterns of decline seen during supply shocks, with particular risks concentrated in consumer, financial, and technology sectors. According to analysis from UBS Group AG's global strategy report dated March 13, even accounting for all alternative supply sources such as pipeline diversions and strategic reserve releases, a sustained closure of the Strait of Hormuz would still create a net shortfall of approximately 10 million barrels per day in the global crude market. Based on current inventory drawdown rates, if the blockade persists until the end of March, international oil prices could rise to around $120 per barrel. Should it continue through April, global inventories might hit historical lows, potentially pushing oil prices above $150 per barrel.
Historical data from seven supply-driven oil price shocks shows the S&P 500 index experienced an average decline of nearly 5%, while the Europe Stoxx 600 fell over 9%, and the Nikkei 225 dropped more than 10%. Consumer and financial sectors were typically the hardest hit, with banking, automotive, durable goods, and retail industries suffering the deepest losses. Interest rate movements generally exhibited a bear-flattening pattern, with both two-year and ten-year yields trending upward, though short-term rates rose more sharply. UBS estimates that if the Strait of Hormuz remains closed through April, US CPI inflation could peak near 5% and remain elevated through the second half of the year.
The Swiss bank also warns that the impact extends beyond crude oil—natural gas supply disruptions could pose an equally significant, if not greater, threat, particularly for Europe and Asia. Furthermore, extreme oil price volatility might evolve into a Value at Risk (VAR) shock, potentially affecting technology stock positions and private credit markets, creating a tail-risk transmission chain that markets have not yet fully priced in.
The Strait of Hormuz is the world's most critical oil transit chokepoint, with daily flows of approximately 20.5 million barrels of crude and refined products. UBS calculations indicate that about 5 million barrels per day are currently being diverted via east-west Saudi pipelines to the Red Sea, while the UAE's Habshan-Fujairah pipeline provides an additional 500,000 barrels per day. Additionally, IEA member nations plan to release 400 million barrels from strategic reserves over four months, equivalent to roughly 3.3 million barrels per day. Iran continues to export approximately 1.5 million barrels daily, nearly unchanged from pre-conflict levels.
However, even when combining all these alternative channels, a daily supply deficit of about 10 million barrels remains. At this consumption rate, global crude and refined product inventories would fall into the bottom third of their historical range by end-March. If the blockade lasts through April, inventories could reach record lows. Given highly uneven global inventory distribution, some low-income Asian economies might face supply emergencies earlier, significantly raising the risk of panic buying.
Refined product markets are already signaling tightness—price increases for jet fuel, diesel, naphtha, and urea have surpassed levels seen around the Russia-Ukraine conflict. Some refiners are reducing petrochemical output in response to crude allocation pressures. UBS notes that this price pressure hasn't yet broadly spread to other commodities like food and metals but considers such spillovers technically feasible.
The natural gas situation could be as severe as the oil crisis, if not more challenging. European gas inventories are at seasonally low levels. Unlike crude oil, which is relatively fungible globally, natural gas is a highly regionalized commodity. Once LNG facilities shut down, restarting requires weeks of cooling to liquefy gas at minus 160 degrees Celsius, making recovery far more difficult than for oil.
Europe and Asia are now competing for LNG cargoes, driving European TTF gas prices substantially higher. In contrast, US Henry Hub gas prices have actually declined since the conflict escalation, benefiting US hyperscale data centers reliant on gas-fired power generation—natural gas accounts for about 40% of the US power mix projected for 2025, making it a critical fuel source for AI computing infrastructure. US LNG exports are rising significantly, with domestic liquefaction hubs nearing full capacity.
UBS analysis of seven supply-driven oil shocks since the 1979 Iranian Revolution reveals consistent asset price reactions. During these events, US large-cap stocks outperformed US small-caps, European, Japanese, and emerging market equities. However, the S&P 500 still suffered a time-weighted average decline of nearly 5%, with the maximum drawdown occurring during the first Gulf War at approximately 15%. The Stoxx 600, Nikkei 225, and MSCI Emerging Markets indices fell by averages of about 9.4%, 10.4%, and 6% respectively.
Notably, the current S&P 500 forward P/E ratio of about 22.1x is significantly higher than the historical average of 14.3x before previous supply shocks, suggesting limited downside cushion. Sector-wise, US banks, automobiles, durable goods, and retail suffered the deepest losses; European retail, durables, autos, and diversified financials led declines; while emerging markets saw the heaviest impacts in diversified financials, consumer services, and capital goods.
Regarding interest rates, both two-year and ten-year US Treasury yields tended to rise during past supply shocks, with short-end increases being more pronounced, resulting in a bear-flattening yield curve. Credit spreads generally widened modestly. Historically, the Federal Reserve cut rates following supply shocks from the 1970s to early 1990s to counter economic weakness, only hiking when inflation approached 10% (after the 1979 Iranian Revolution and the 2022 Russia-Ukraine conflict).
UBS baseline scenario, based on the March 12 oil futures curve, projects US CPI inflation rising sharply in coming months, reaching 3.6% year-on-year by May before gradually declining to 3.1% by end-2026. If the Strait of Hormuz closure lasts through March, pushing oil to $120 per barrel before falling to $80 by year-end, May CPI could reach 4.7% year-on-year. Should the blockade extend through April, with oil staying at $150 until June before moderating, the inflation peak would be slightly higher and remain elevated through the second half of 2024, only dropping sharply early next year when energy inflation turns significantly negative. In all scenarios, core inflation impact is expected to be relatively limited as the shock is perceived as temporary, with long-term inflation expectations remaining anchored.
The bank expresses greater concern about inflation eroding consumer purchasing power than about potential central bank policy shifts. With US real disposable income growth already stagnant and personal savings rates near historical lows, consumer and financial sectors would be particularly vulnerable to an inflationary shock.
UBS also highlights a more subtle transmission risk. Severe oil price dislocation might not only manifest as growth and inflation shocks but could evolve into VAR and liquidity shocks. Even without aggressive central bank rate hikes, markets might price in a more hawkish policy path, tightening liquidity expectations and affecting funding conditions in private credit and investment-grade/high-yield bond markets.
Through this channel, liquidity tightening and enhanced risk management could amplify existing vulnerabilities in private credit. This might trigger synchronized unwinding of technology long positions across equity and credit markets via position liquidation mechanisms. UBS identifies this as a tail risk not yet fully priced by markets, warranting investor vigilance.
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