Commodities

In this report, we deviate from our base case and instead assume that there is an immediate improvement in Hormuz traffic. This exercise allows us to explore how the global oil supply shortfall could eventually be offset if the right conditions are in place.

The Iran war provides a timely motivation for examining how the main financial asset classes and commodity sectors perform across different inflation regimes and during periods of elevated geopolitical risk.

Over the past month, oil market participants have scrambled to fill the gap in global oil supply caused by the Strait of Hormuz’s closure. While these efforts have been impressive, the scale of the disruption means they are ultimately insufficient. Upside pressures will continue to dominate energy prices until transit through the Strait of Hormuz is restored.

Overstretched foreign inflows into Brazilian markets will reverse, while soaring oil prices will not benefit Brazil in the near term. Avoid the country’s risk assets and the BRL, and stay underweight Brazilian equities and fixed income relative to EM. We also recommend paying 10-year Brazilian swap rates.

WTI is relatively calm amid the current conflict in the Middle East. Markets are too complacent on US crude relative to other international benchmarks. 

Higher oil prices threaten the global economy, warranting an underweight stance on equities. Over the long haul, industrial metals will fare better than crude.

We outline a framework for the Iran war's impact on the commodity outlook in the event of a prolonged Strait of Hormuz disruption. We break it down into three phases: (1) the Initial Shockwave, (2) the Ripple Effects, and (3) the Backwash. The first phase has largely passed, and we are now in the Ripple Effects phase.

The Iran war remains a terms-of-trade shock rather than a classic flight to safety – for now. As oil risks skew higher, policy repricing and growth differentials should continue to favor a tactical rebound in the USD.

In the ongoing Middle East crisis, anti-fragile markets will remain relatively resilient while fragile markets will break. We describe how to draw the distinction. Plus, a new trade is a 50:50 combination of long USD/MXN and overweight Consumer Discretionary.

The war in Iran is disrupting global oil and LNG flows and remains a threat to regional energy infrastructure. 

Energy price risks remain skewed to the upside over the near term.