
As Iran prepares retaliation after the US strikes on three of its nuclear sites, foreign brokerage UBS has issued a warning highlighting two major risks facing investors due to escalating tensions in the Middle East. The first concern is whether energy exports, particularly oil shipments through the Strait of Hormuz, will be interrupted. The second pertains to the possibility of other significant countries intervening in the conflict. These issues are critical as they hold significant implications for global markets and economies.
To be sure, Iran’s foreign minister Abbas Araghchi warned the US strikes will have consequences and that Teheran “reserves all options to defend its sovereignty, interest, and people.” This is after the US President Donald Trump confirmed that US B-2 bombers had dropped a full payload of bombs on the primary target, Fordow.
UBS notes that oil is the primary channel through which Middle East tensions affect the global economy and financial markets. In the short term, the potential escalation of conflicts could lead to disruptions in oil supplies, driving prices upward as investors factor in the risks. This scenario underscores the broader economic impact of geopolitical developments in the region, with swift changes in oil prices potentially affecting various sectors.
The brokerage expresses concern about possible retaliatory actions by Iran against US bases, allies, and energy infrastructure in the wider region. The extent of damage Iran could inflict remains uncertain, but there is a risk that drone technology could play a larger role if strikes occur near Iran's borders. This aligns with observations from the Ukraine conflict, where combined missile and drone attacks have strained air defence systems.
UBS also points out the risk of Iran disrupting maritime traffic through the Strait of Hormuz, a crucial chokepoint for global oil shipments. A significant attack could damage key regional assets, as evidenced by the 2019 incident at Saudi Arabia's Abqaiq oil processing facility. Despite these risks, UBS suggests that Iran's military capabilities have been weakened by ongoing air campaigns, making prolonged resistance against Israeli and US forces unlikely.
"Threatening maritime traffic through the Strait of Hormuz, or mining this crucial chokepoint, remain a possibility. In a risk case, Iranian attacks could damage or destroy key assets in the region. A 2019 attack on Saudi Arabia’s Abqaiq oil processing facility temporarily stopped nearly half of the kingdom’s oil production," UBS noted.
In response to potential disruptions, restoring energy supplies would be a key focus. Historically, OPEC(+) has increased production to maintain market balance during sustained disruptions, and OECD countries have tapped into strategic reserves to cover temporary shortages. These measures aim to stabilise markets in the face of unforeseen supply chain disturbances.
The possibility of further US involvement provoking other countries to join the conflict is another concern, particularly regarding Russia. While Russia has formed a strategic partnership with Iran, its military resources are already stretched due to the Ukraine war. Furthermore, becoming an antagonist to the US and Israel could lead to increased sanctions or support for Ukraine, which Russia is keen to avoid.
UBS also discusses investment strategies, suggesting that the current market conditions could offer opportunities for investors who are underallocated to equities. Despite the geopolitical risks, UBS does not anticipate prolonged disruptions to oil supplies that would threaten global economic growth or present significant challenges for central banks.
Overall, UBS's analysis provides a comprehensive look into the potential impacts of Middle East tensions on global markets, with insights into the regional geopolitical dynamics and their broader economic implications. Investors are advised to be mindful of these developments as they navigate the complex landscape of international markets.