The US-Iran tensions have escalated into war; and oil as the fever gauge for geopolitics reacts accordingly. Unlike earlier confrontations, the mission is not the destruction of infrastructure, but regime change. This context adds complexity and length.
Julius Baer analysis clearly shows that the real economic danger lies not in the rhetoric around a closure of the Strait of Hormuz but rather in any serious damage to key regional oil and gas infrastructure. The key transmission channel, therefore, is the oil price. So far, trade through the Gulf is impaired, but infrastructure damage appears limited and the market looks prepared for a disruption lasting days or weeks rather than months. This means that three broad scenarios are possible.
Oil: Three possible outcomes of Middle East conflict
| Scenario | Probability | Oil Price | Market Dynamics |
|---|---|---|---|
| Swift & intense | Above 60% chance | Oil tops above USD 80 in March and eases before summer. Brent crude oil briefly tipping into the USD 80–USD 90 range before easing as Washington seeks a political exit and Iran’s response stays contained. | Trade through Hormuz is crippled temporarily, there is no serious damage to oil & gas infrastructure. The conflict remains contained; Iranian exports are down lastingly. |
| Enduring & chaotic | Up to 30% chance | Oil tops up to USD 100 before summer, eases into autumn. Oil stays north of USD 90 for longer, tightening financial conditions and reviving stagflation worries. | The conflict spreads and brings chaos; oil & gas infrastructure is seriously damaged. Shipping risk lingers, oil shipping requires security escorts. Prolonged due to regime-change objective. |
| Oil crisis (Tail Risk) | Below 5% chance | Oil spikes lastingly and dents the world economy, out of the fog of war. A full-blown oil crisis, with severe infrastructure damage and sustained regional spillover. | Military dominance against Iran and proven defences of key oil & gas infrastructure speak against this scenario. Severe infrastructure damage occurs; sustained regional spillover. Remains the scenario that oil still hedges best. |
With regard to the flow of oil & gas from Middle Eastern producers to consumers in Asia and Europe, trade has largely ground to a halt for precautionary reasons. The clogging of ships on both sides of this trade chokepoint, however, bears further consequences, which are likely being taken negatively by the market. With storage space filling up, oil fields and refineries will be forced into curtailments, as already allegedly reported in Iraq. Such news will likely add to the prevailing supply concerns, adding further fuel to the energy shock in the very near term. Our base-case scenario remains a short-lived, intense spike in oil and gas prices.
So far, we are not aware of any significant damage to ships or infrastructure, nor of any serious attempts by Iran to close this shipping route. The risk of oil & gas supply disruption largely depends on how long the Iranian regime can endure, as well as its military strength and command lines.
Importantly, all short- and long-term scenarios lead to the same, supply-resilient oil market. The petro-nations have the capacity to compensate for less Iranian exports. Iran’s oil richness will eventually make it back to the market, just as Venezuela’s does.
What must investors keep in mind?
Our base case is that the situation remains fluid but does not become catastrophic: a swift, intense spike in the oil price is one path; a longer, chaotic disruption another; a full-blown oil crisis remains a tail risk, not the central case.
For equity investors, history offers some comfort: shocks in the Middle East have often meant sharp drawdowns, followed by stabilisation within one-to-three months. However, elevated starting valuations, especially in Europe, leave little room for disappointment. Defensive quality remains the better bias, while oil & gas can hedge portfolios tactically, and transport and chemicals are most exposed to energy-cost pressure.
In fixed income, the test is whether US Treasuries still behave as a safe haven. So far, they have regained much of that role, and bond yields have shown less sensitivity to supply-driven oil shocks than in the past. We continue to favour intermediate maturities with limited credit risk, while keeping corporate credit shorter-dated.
With regime change in Iran, geopolitics in the region should cool long term past transition chaos near term. The current events do not alter the big picture of a lastingly well-supplied oil market. For the time being, uncertainty prevails.
Outside of Iran, the week is hardly empty: China’s ‘Two Sessions’, global PMIs, and, above all, the US labour report still matter for growth and policy expectations. In the fog of war, patience is not passivity – it is portfolio discipline.