Oil

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 gap between PCE and CPI inflation will narrow within the next few months, mostly driven by core PCE inflation converging toward its trimmed mean.

The conflict in the Middle East persists as the US and Israel keep striking at Iranian military and internal security sites, and Iran has responded with its own missiles and drones against the Gulf States. Although the pace of Iranian retaliation has declined, it appears to have stabilized, as evidenced by attacks against the UAE.

Oil prices will likely rise in the near term, irrespective of developments in the Strait of Hormuz. Given that global share prices have become correlated with crude prices, global stocks will continue selling off. Go short the EM equity index and take profits on our open trades that have benefited from the global risk-on environment.

The recent oil price shock reinforces our view that inflation will surprise to the upside during the next few months but fall rapidly in H2 2026.

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.

It is too soon to sell the rip in oil or buy the dip in stocks. Stick with risk-off trades for now.

Middle East hostilities have triggered risk-off moves and pushed oil prices higher. Previous geopolitically driven oil price disruptions suggest that speed, persistence and equity market vulnerability relate to the degree of the market sell off. At the other end of the spectrum, energy stocks should benefit, but have already rallied significantly.

MacroQuant recommends a modest overweight position in equities, favors an above-benchmark duration stance in fixed-income portfolios, remains bearish on the US dollar, has downgraded oil to neutral, and is bullish on copper and gold.

Oil price risks remain skewed to the upside over the near term as geopolitical risks continue to dominate.

Nevertheless, we ultimately expect bearish fundamentals to reassert themselves over a six-to-12-month timeframe and drive oil prices lower.