Transcript
A (0:00)
Welcome to Thoughts on the Market. I'm Michael Zesus, Morgan Stanley's deputy global head of research.
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And I'm Ariana Salvatore, head of Public Policy Research.
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Today we're discussing the escalating U. S. Iran conflict, the market reaction, and what investors should be watching for Next. It's Wednesday, March 4th at 7:30am in
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San Francisco and 10:30am in New York.
A (0:24)
So Ariana, I in San Francisco at Morgan Stanley's TMT conference. But obviously events in Middle east have captured everyone's attention. There's uncertainty around the conflict and really important questions about how it affects all of us. And of course, markets have to discount all sorts of future uncertainty about very specific impacts to financial asset prices, to commodity prices and really look at it through that narrow lens. And so Arianna, the administration has suggested that this conflict and this campaign could last a few weeks. But also it said it could continue as long as it takes. So what are the clearest signals investors should watch for to gauge duration?
B (1:12)
For now, we're focused on three main indicators. First, I would say, and most important, is clarity around the objectives. The president and others in the administration have referenced things like eliminating Iran's missile arsenal, its navy, and limiting proxy activity. Those goals are broader than the earlier focus on just the nuclear programs. Each objective, of course, implies a different timeline. A narrower objective likely means a shorter engagement. Broader ambitions, conversely, would extend it. So that's the first thing. Second, obviously extremely important is traffic through the Strait of Hormuz. We'd view this full closure as unlikely given the economic consequences for Iran itself. But tanker flows have at least temporarily fallen close to zero, and that's significant because production across the region has not been impaired. This is not about oil fields going offline. It's about whether or not oil can actually move. If shipping lanes normalize within weeks, markets can recalibrate. However, if flows remain materially curtailed beyond five weeks, the risks rise meaningfully. Third, the frequency of strikes and proxy activity sustained or escalating engagement would suggest a longer conflict. Signs of diplomacy, on the other hand, might indicate de escalation.
A (2:24)
Right. So let's build on that and talk about oil. And our colleague Martin Ratz has really laid this out with a lot of different scenarios. But what we're seeing right now is that when it comes to oil, this is really a shock to the transport of of it, not necessarily a shock to its production. So oil supply exists. The question is really can it be delivered or not? So if tanker flows normalize and the geopolitical risk premium fades What Martin is saying is that global oil prices could move back towards 60 to $65 a barrel. If the logistical disruption lasts four to five weeks, then prices maybe trade in the $75 to $80 range. And if disruption extends beyond five weeks and flows are materially constrained, then you could see a situation where oil prices have to rise towards 120 or $130 a barrel. And at that level, demand destruction is what becomes the balancing mechanism in setting price for oil. So one signal to watch is longer dated oil prices. Early month contracts can spike during geopolitical stress, but a sustained move materially above $80 to $85 barre would likely require longer dated prices to move higher as well. And that might signal that markets believe the disruption is persistent and not temporary. Arianna, what about natural gas here? How does that situation fit into the energy story?