By Martin Baccardax
Wall Street and a large portion of major global investors are betting on signals from the oil market that suggest limited supply disruptions and temporary price spikes tied to the U.S. war with Iran.
But what if the signals are downplaying the risks?
One of the key planks of the market's recent recovery, which has lifted the S&P 500 more than 4% over the past week, has centered on data from the oil futures market, where investors bet on crude prices at various points in the calendar over the coming year.
Brent futures for August delivery, a benchmark for where global oil prices might trade at the end of the summer, have fallen more than 5% from their mid-March peak, and around 3.6% from the end of the month.
December delivery futures, meanwhile, have fallen around 4.5% since mid-March and were last marked under $80 a barrel. That's still around 22% north of their prewar levels, but more than 25% below the current price investors must pay for a barrel of oil today.
"While the front of the curve reflects acute scarcity, the lower prices further out suggest that participants anticipate at least partial normalization over time," said Saxo Bank's head of commodity strategy Ole Hansen. "This could come through a combination of demand destruction, supply adjustments, or an eventual easing of geopolitical tensions."
Deutsche Bank macro strategist Henry Allen says this means that markets "aren't pricing in a sustained oil shock like we saw in 2022," amid Russia's invasion of Ukraine, "so given today's crisis doesn't yet meet the severity thresholds of past oil shocks the more limited reaction makes sense."
The S&P 500 has pared its postwar decline to around 4.5%, leaving it down around 4% for the year, and Wall Street continues to hold on to year-end price targets that would see a rally of more than 16% from current levels.
But, as Capital Economics' Thomas Mathews notes, while stocks and crude markets are closely linked, "history tells us that U.S. equities and oil won't necessarily hit their turning points at the same time during this conflict."
"It's easy to imagine an analogous scenario this year, in which the Federal Reserve hikes and the economy slips into recession," he added. "In that case, it's quite possible that the S&P 500 would head lower even if the war died down and oil prices fell back a bit."
That's not his base case, and in fact he argues that the U.S. economy isn't as oil-reliant as it once was, and was on solid footing heading into the war.
"As such, oil and equities decoupling the other way is arguably more plausible: that is, earnings momentum, amid a resilient economy, helps the S&P 500 grind higher even if oil prices stay high," he added.
But that seems like a risky bet.
The U.S. bombed Iran's Kharg Island, a crucial energy storage facility in the Gulf region, on Tuesday and President Donald Trump threatened that "a whole civilization" may be wiped out.
Even accounting for bluster, bluff, and negotiation tactics, it's an extraordinary statement from any world leader, let alone a U.S. president, to make.
Its impact would constitute a direct attack in and around the most important oil producing region on the planet, so it's difficult to see how investors are factoring in lower, not higher, prices over the back half of the year.
"The closure of the Strait of Hormuz represents the largest disruption of the global oil and gas trade in modern history," said Kenny Zhu, research analyst at Global X, who sees "echoes of the 1979 Iranian revolution and the Iran-Iraq war"
In late 1970s and early '80s, it's worth remembering, oil prices peaked in April 1981, but stocks didn't hit their ultimate trough for another 18 months, in August 1982. During the later part of the decade, oil peaked in July 1987, during the Iran-Iraq war, and stocks collapsed during the great October crash just three months later.
"But today's setup is different in one important way: this conflict is directly affecting some of the world's most important sources of spare capacity," he added. "The net result could be materially higher energy prices relative to prewar levels."
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 07, 2026 15:17 ET (19:17 GMT)
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