If the situation in the Middle East cannot be eased quickly...

The market’s pricing of a prolonged Middle East conflict remains severely inadequate—if the Strait of Hormuz blockade continues, crude oil prices could break through $150 per barrel before the end of April. U.S. inflation is expected to approach 5%, and global equities may repeat the downward pattern caused by supply shocks in history, with particular risks to consumer, financial, and technology sectors.

According to Wind Trading Desk, UBS’s global strategy report released on March 13 states that even considering all alternative supply sources such as pipeline rerouting and strategic reserve releases, if the Strait of Hormuz remains closed, the global crude oil market will face a net shortfall of about 10 million barrels per day. Based on current inventory consumption rates, if the blockade persists until the end of March, international oil prices could rise to around $120 per barrel; if it continues until the end of April, global inventories may reach historic lows, with prices potentially surpassing $150 per barrel.

Historical data shows that in seven supply-driven oil price shocks, the S&P 500 index averaged a decline of nearly 5%, the Euro Stoxx 600 fell over 9%, and the Nikkei dropped more than 10%. Consumer and financial sectors are hit hardest, with banks, automakers, durable goods, and retail experiencing the deepest declines. Interest rates show a flattening in a bear market pattern, with both two-year and ten-year yields tending upward, especially at the front end. If the Strait of Hormuz remains blocked until the end of April, UBS estimates U.S. CPI inflation could peak near 5%, remaining high into the second half of the year.

UBS also warns that the impact is not limited to crude oil—natural gas supplies could pose an equally or more significant threat, especially for Europe and Asia. Additionally, sharp oil price fluctuations could evolve into VAR shocks, affecting technology stock positions and private credit markets, forming a tail risk transmission chain that the market has not fully priced in.

Strait of Hormuz Blockade: Alternative Channels Cannot Fill the 10 Million Barrel/Day Gap

The Strait of Hormuz is the world’s most critical oil transportation route, with an average daily throughput of about 20.5 million barrels of crude and refined products. UBS estimates that currently about 5 million barrels per day are rerouted via east-west Saudi pipelines to the Red Sea, with the UAE’s Habshan-Fujairah pipeline providing an additional roughly 0.5 million barrels per day. Moreover, IEA member countries plan to release 400 million barrels of strategic reserves over four months, equivalent to about 3.3 million barrels per day. Iran’s current exports remain around 1.5 million barrels per day, close to pre-conflict levels.

However, even with all these alternative channels combined, there remains a supply shortfall of approximately 10 million barrels per day. Based on this consumption rate, global crude and refined product inventories could fall into the bottom third of their historical range by the end of March, and if the blockade persists until the end of April, they could reach historic lows. Due to uneven global inventory distribution, some low-income Asian economies may face supply shortages even earlier, with panic buying risks significantly increasing.

Refined product markets have already signaled shortages—prices for jet fuel, diesel, naphtha, and urea have risen beyond pre-Ukraine conflict levels, with some refining companies cutting back on petrochemical production in response to crude rationing pressures. UBS notes that this price pressure has not yet broadly spread to food and metals commodities but considers it technically feasible.

Natural Gas: Another Pressure Point for Europe and Asia

UBS believes that natural gas issues could be as severe or even more challenging than oil. European natural gas inventories are at seasonal lows. Unlike crude oil, which is more globally fungible, natural gas is highly regionalized; liquefied natural gas (LNG) facilities, once shut down, require several weeks to cool and re-liquefy gas at -160°C, making recovery much more difficult than oil.

Europe and Asia are currently competing for LNG resources, driving European TTF natural gas prices sharply higher. In contrast, U.S. Henry Hub natural gas prices have actually declined since the conflict escalated, benefiting large U.S. data centers reliant on natural gas for power—gas accounts for about 40% of U.S. electricity generation in 2025 and is a key fuel for AI infrastructure. U.S. natural gas exports are increasing significantly, with domestic liquefaction terminals operating near capacity.

Historical Perspective: U.S. Large Caps Outperform but All Sectors Under Pressure

UBS, analyzing seven supply-driven oil shocks since the Iranian Revolution in 1979, summarizes asset price response patterns. In these events, U.S. large-cap stocks generally outperformed small caps, European, Japanese, and emerging market equities. However, the S&P 500’s volume-weighted average decline was still close to 5%, with the largest drawdown around 15% during the first Gulf War. The STOXX 600, Nikkei, and MSCI Emerging Markets indices declined approximately 9.4%, 10.4%, and 6%, respectively.

Notably, the current S&P 500 valuation is about 22.1 times earnings, significantly above the historical average of 14.3 times before previous supply shocks, indicating limited downside buffer. Sector-wise, banks, automakers, durable goods, and retail in the U.S. saw the deepest declines; in Europe, retail, durable goods, automotive, and diversified financials led declines; in emerging markets, diversified financials, consumer services, and capital goods were most affected.

Interest rates tend to rise in both two-year and ten-year U.S. Treasuries during these shocks, with front-end yields rising more sharply, flattening the yield curve in a bear market pattern. Credit spreads generally widen only modestly. Historically, after supply shocks from the 1970s to early 1990s, the Fed responded with rate cuts to combat recession, only raising rates when inflation approached 10% (e.g., 1979 Iran Revolution and 2022 Russia-Ukraine conflict).

Inflation Could Approach 5%, Consumer Side More Concerning

Based on UBS’s baseline scenario from the March 12 crude futures curve, U.S. CPI inflation could surge sharply in the coming months, reaching 3.6% YoY in May, then gradually declining to 3.1% by the end of 2026. If the Strait of Hormuz remains blocked until the end of March, pushing oil prices to $120 per barrel, and then falls back to $80 by year-end, CPI could peak at 4.7% in May. If the blockade persists until the end of April, with oil at $150 per barrel until June, inflation could peak slightly higher and remain elevated into the second half of the year, only dropping sharply after energy inflation turns negative early next year. In all scenarios, the impact on core inflation is expected to be limited temporarily, with long-term inflation expectations remaining stable.

UBS notes that compared to the risk of high inflation causing significant shifts in central bank policies, they are more concerned about inflation eroding consumer purchasing power. U.S. real disposable income growth has stagnated, and personal savings rates are near historic lows—under this environment, any inflation shock could hit consumer and financial sectors hardest.

VAR Shock Risks: Hidden Dangers in Tech Stocks and Private Credit

UBS also highlights a more subtle transmission channel. Severe oil price dislocation could not only impact growth and inflation but also evolve into VAR shocks and liquidity shocks. Even if central banks do not aggressively hike rates, markets may price in a more hawkish policy stance, tightening liquidity expectations and affecting private credit and investment-grade/high-yield bond financing conditions.

In this chain, liquidity tightening and risk management tightening could amplify vulnerabilities in private credit markets, triggering margin calls and forcing long positions in tech stocks and credit markets to unwind simultaneously. UBS considers this a tail risk not fully priced into current markets, warranting investor vigilance.

Risk Warnings and Disclaimers

Market risks are inherent; investments should be made cautiously. This document does not constitute personal investment advice and does not consider individual user objectives, financial situations, or needs. Users should determine whether any opinions, views, or conclusions herein are suitable for their specific circumstances. Responsibility for investment decisions rests solely with the user.