From Oil Disruptions to Inflationary Pressures
No one knows how the situation in the Middle East will evolve. We see three possible scenarios:
Scenario 1
A swift peace agreement is reached between Iran, Israel, and the United States, and the Strait of Hormuz is fully reopened. Although physical shortages of oil and gas have already emerged in certain parts of the world—traded at significantly higher prices than elsewhere—it is expected that, under this scenario, prices will relatively quickly return to pre-war levels.
It should be noted that several major production facilities in the Middle East have sustained significant damage, and repairs will take time. However, prior to the outbreak of the conflict, energy markets were characterized by supply surpluses, and it is widely assumed that any current physical shortages will dissipate in the near term.
As a result, oil prices are likely to decline to approximately $60 per barrel over time, and the overall impact on the global economy will remain limited. For financial markets, this would likely mean that yields on 10-year U.S. and German government bonds—currently around 4.3% and 3%, respectively—would fall back to approximately 3.8% and 2.5%. At the same time, equity markets could continue to rise, with stronger performance in Europe than in the U.S., while the U.S. dollar may weaken further against the euro and the yen.
Scenario 2
An opposite scenario is also conceivable: a significant escalation of hostilities and a prolonged closure of the Strait of Hormuz. This would be highly detrimental to the global economy, as substantial shortages of oil, gas, helium, and fertilizers could emerge within weeks, accompanied by sharp price increases.
Such developments would likely be sufficient to push a considerable number of countries into recession, including the United States, despite its relative energy self-sufficiency. This scenario would effectively result in stagflation: stagnant economic growth combined with rising inflation and interest rates.
Equity markets would also be negatively affected, potentially leading to lower interest rates at a later stage. The U.S. dollar would likely strengthen, as the U.S. economy is better positioned to withstand high energy prices than most other economies.
Scenario 3
In our view, this is by far the most likely scenario. President Trump faces a complex dilemma: as long as energy prices remain elevated, the purchasing power of most Americans will decline. This is occurring in the context of a conflict he had pledged to avoid and whose objectives remain largely unclear. Without a change in direction, there is a risk that Congress could shift toward the Democratic Party in November.
At the same time, withdrawing from the conflict is not a viable option if Iran retains enriched uranium and the Strait of Hormuz remains largely closed. Such a move would represent a significant loss of credibility for both the United States and the President personally. Therefore, the most pragmatic course of action would be to pursue a ceasefire and initiate negotiations with Tehran.
The key question, however, is whether Iran is willing to cooperate. We believe this is likely, not least due to pressure from Beijing. China relies heavily on Middle Eastern oil and has no interest in further escalation or rising energy prices, while simultaneously seeking to challenge U.S. influence.
In all likelihood, negotiations between the U.S. and Iran will take place. However, positions remain far apart, with both parties believing they hold strong leverage: the U.S. due to its military superiority, and Iran due to its control over the Strait of Hormuz and its support from China.
For this reason, we expect negotiations to be protracted and complex. Persistently high oil prices, which increasingly damage the global economy—including that of the U.S.—will strengthen Tehran’s negotiating position.
While President Trump will likely aim to reach an agreement as quickly as possible, Iran’s demands currently appear too high to be acceptable.
Conclusion
We expect that large-scale hostilities will not resume in the near term, and that the primary focus will be on negotiations between the U.S. and Iran—a process likely to take several months. During this period, the Strait of Hormuz will probably remain largely closed or only partially reopened.
As a result, energy prices are expected to remain elevated—insufficient to trigger widespread recessions, but high enough to cause significant economic strain in many Western countries, particularly through persistently high inflation and subdued growth.
Combined with import tariffs that many U.S. companies have yet to fully pass on to consumers, we expect further price increases across a range of goods in the United States (so-called secondary inflation effects).
Accordingly, we anticipate that inflation in the U.S. will rise further and remain elevated for longer than is currently widely expected, likely resulting in higher interest rates than presently forecast.
Read more on this and related topics in our latest Global Financial Markets Report
