Morgan Stanley Says Protracted Hormuz Talks May Keep Oil Prices Elevated
Forecast Trend Report by Period
Negotiations between the U.S. and Iran over the Strait of Hormuz are unlikely to reach a quick resolution, raising the prospect that uncertainty over crude supply will persist.
Morgan Stanley wrote in an Aug. 13 report that the talks will probably turn into a prolonged process of partial agreements, implementation checks and renewed negotiations.
The two sides signed a memorandum of understanding in mid-June to begin talks covering commercial transit through the Strait of Hormuz, relief from U.S. maritime blockade sanctions and Iran's nuclear program. Iran has linked a full reopening of the strait to a broader agreement that also addresses an end to the blockade, sanctions relief and compensation. The U.S., by contrast, has maintained its opposition to making concessions upfront.
The sequencing of sanctions relief and the nuclear issue remain key sticking points. Washington wants to ease sanctions in stages as negotiations progress, while Tehran is seeking assurances that any sanctions relief would not be easily reversed. Differences also remain over uranium enrichment levels, existing stockpiles and the International Atomic Energy Agency's verification framework.
Morgan Stanley said investors should focus less on whether the talks break down than on whether maritime transit returns to normal, IAEA inspectors retain access, sanctions are eased and both sides maintain military restraint. Both countries have an incentive to avoid a return to full-scale conflict, though the negotiations themselves are expected to remain uneven and volatile.
The bank maintained a bullish outlook for oil. As uncertainty over crude supply through the Strait of Hormuz persists, global oil market balances may remain tighter than they were immediately after the June memorandum was signed.
For U.S. equities, Morgan Stanley identified another sharp surge in oil prices as the main near-term risk. Even so, the bank said the Federal Reserve would need a much larger inflation shock than markets currently expect to resume raising interest rates, and it expects the Fed to keep rates unchanged this year.
