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

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The market is still significantly underpricing the risk of a protracted Middle East conflict—a prolonged closure of the Strait of Hormuz could push crude oil prices over $150 per barrel by the end of April, U.S. inflation could approach 5%, global stock markets would repeat the historical downward trend triggered by supply shocks, and risks would be especially pronounced for consumer, financial and tech stock positions.

According to information from Zhuifeng Trading Desk, and a global strategy report released by UBS on March 13, even after accounting for all alternative supply sources such as pipeline diversion and the release of strategic reserves, if the Strait of Hormuz remains closed, the global crude oil market will still face a daily net shortfall of around 10 million barrels. Based on the current pace of inventory depletion, if the closure continues to the end of March, international oil prices could rise to about $120/bbl; if it continues until the end of April, global inventories may reach historic lows and prices could break through $150/bbl.

Historical data shows that in seven supply-driven oil price shocks, the S&P 500 index’s average decline was nearly 5%, the STOXX 600 fell over 9%, and the Nikkei index fell over 10%; consumer and financial sectors were hit first, with banks, automobiles, durable goods, and retail seeing the most significant declines. Interest rates tended toward a bear flattener, with both 2-year and 10-year Treasury yields usually moving higher, especially at the front end. If the Strait of Hormuz remains closed through the end of April, UBS estimates U.S. CPI inflation could peak near 5% and remain elevated through the second half of this year.

UBS also warns the shock is not limited to oil—natural gas supplies could pose an equally, or even greater, threat, especially for Europe and Asia. In addition, sharp swings in oil prices could trigger a VAR shock and then spill over into tech stock positions and the private credit market, forming a tail risk transmission chain that is not yet fully priced in by the market.

Hormuz Blockade: Alternative Routes Cannot Cover Ten-Million-Barrel Shortfall

The Strait of Hormuz is the world’s most critical oil shipping chokepoint, with around 20.5 million barrels of crude and refined product transiting daily. UBS estimates that currently, about 5 million barrels a day are rerouted through east-west Saudi pipelines to the Red Sea, with the UAE’s Habshan–Fujairah pipeline providing another 500,000 barrels a day; additionally, IEA member states plan to release 400 million barrels of strategic reserves over four months, equal to about 3.3 million barrels a day. Iran is currently maintaining around 1.5 million barrels a day in exports, roughly unchanged from pre-conflict levels.

However, even after totaling all these alternative sources, there remains a supply shortfall of about 10 million barrels a day. At this rate of consumption, global crude and refined product inventories would fall into the lowest third of their historical range by the end of March, and could reach all-time lows if the closure persists through April. Given the very uneven global inventory distribution, some lower-income Asian consumer economies may face supply crises sooner, and the risk of panicked buying would rise sharply.

The refined products market has already signaled shortages—jet fuel, diesel, naphtha, and urea prices have all risen above levels seen during the early Ukraine war, with some refiners cutting petrochemical output pressure in response to oil rationing. UBS notes this price pressure has not yet broadly spread to food and metals, but deems this scenario technically feasible.

Natural Gas: Another Major Pressure for Europe and Asia

UBS believes that the natural gas issue could be as severe as oil, or even more so. European gas inventories are at seasonal lows. Unlike oil, which is easy to redeploy globally, natural gas is highly regional; if liquefaction facilities shut down, it takes weeks to restart and gases must be cooled to minus 160°C for liquefaction, making recovery much harder than for oil.

Europe and Asia are currently competing for LNG resources, pushing European TTF gas prices much higher. In contrast, the U.S. Henry Hub price has actually come down since the escalation of conflict, benefiting America’s hyperscale data centers that rely on natural gas for power—natural gas will account for around 40% of U.S. electricity in 2025, and is a critical AI infrastructure fuel. U.S. gas exports are up sharply and domestic LNG plants are running near full capacity.

Historical Parallels: U.S. Large Caps Outperform, But All Under Pressure

UBS, through studying seven supply-driven oil shocks since the 1979 Iranian Revolution, summarizes a pattern of asset price responses. In these events, U.S. large caps outperformed U.S. small caps, Europe, Japan, and emerging markets, but the time-weighted average decline for the S&P 500 was still almost 5%, with a maximum of around 15% during the First Gulf War. The STOXX 600, Nikkei, and MSCI Emerging Markets indices had average drops of 9.4%, 10.4%, and 6% respectively.

Notably, the S&P 500 P/E ratio is now about 22.1, well above the pre-shock historical average of 14.3, suggesting limited downside cushion. Among sectors, U.S. banks, autos, durables, and retail have the steepest declines; in Europe, retail, durables, autos, and diversified financials are hardest hit; in emerging markets, diversified financials, consumer services, and capital goods are most affected.

Interest rates: In previous supply shocks, both 2-year and 10-year U.S. Treasury yields generally rose, with front-end increases larger, for a bear flattening pattern; credit spreads widened only modestly. Historically, after shocks, the Fed cut rates to support the economy, except when inflation neared 10% (1979 Iranian Revolution, 2022 Russia-Ukraine war), when they raised rates.

Inflation May Approach 5%, Consumer Pressures More Worrisome

UBS’s baseline scenario based on March 12 crude futures curves shows U.S. CPI inflation will surge over the coming months, reaching 3.6% year-on-year in May, before gradually falling back to 3.1% by the end of 2026. If the Strait of Hormuz remains closed through March with oil at $120/bbl and then retracts to $80/year-end, May y/y CPI may hit 4.7%; if the closure lasts through April with oil staying at $150/bbl till June before retreating, inflation would peak even higher and stay elevated through the second half, only dropping sharply when energy inflation turns substantially negative early next year. In all scenarios, since the shocks are temporary, core inflation impacts should stay limited, and long-term inflation expectations remain stable.

UBS notes that compared to the risk of inflation triggering significant policy shifts by central banks, it is more concerned about inflation eroding consumers’ purchasing power. Real disposable income growth in the U.S. has stalled, and the personal savings rate is near historic lows—on this backdrop, another inflation shock would hit U.S. consumer and financial sectors hardest.

VAR Shock Risk: Technology Stocks and Private Credit Exposed

UBS also warns of a subtler transmission chain. Severe misalignment in oil prices may not only hit economic growth and inflation, but also become a VAR and liquidity shock. Even without aggressive rate hikes by central banks, markets could reprice policy much more hawkishly, tightening liquidity expectations and worsening financing conditions for private credit and IG/HY bond markets.

Through this chain, tighter liquidity and stricter risk management could amplify vulnerabilities in private credit and, via margin calls, trigger simultaneous deleveraging of tech stock long positions in both equity and credit markets. UBS believes this is a tail risk not yet fully reflected in market prices, and investors should remain vigilant.

Risk Warning and DisclaimerMarkets are risky, and investment requires caution. This article does not constitute personal investment advice and does not take into account the individual investment objectives, financial situation or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article suit their specific circumstances. Investing based on the content herein is at your own risk. ```