Oil prices under the grip of the Strait of Hormuz
One month after the attack on Iran, oil prices remain at elevated levels around USD 110 per barrel, with intra-month peaks of USD 120. This is the highest level since 2022, and volatility has been unusually high. The Strait of Hormuz, through which around one quarter of the world’s oil exports normally pass, was for a period effectively closed to shipping traffic. The strait has gradually reopened somewhat, but on Iran’s terms and with fees that slow the free flow. Negotiation signals from both Washington and Tehran have been contradictory, and repeated deadlines have been set and postponed. A regime change in Iran appears increasingly unlikely. The key uncertainty is now not whether the conflict will escalate further, but how long it will take before an agreement or ceasefire is reached.
The shadow of stagflation over the global economy
Persistently high energy prices have triggered a classic stagflationary pressure on the global economy: inflation rises while growth slows. In the United States, average fuel prices have exceeded USD 4 per gallon for the first time since 2022, directly eroding household purchasing power. The positive impulses from tax cuts and fiscal stimulus are therefore dampened by the energy bill, although they still act as a buffer against a sharp decline in activity. Historically, stagflation has been negative for both equity and bond markets, and the picture is further complicated by the approaching U.S. midterm elections. Experience suggests that the administration responds when market turbulence becomes significant enough. The expectation is that pressure toward de-escalation will increase as the economic consequences become more visible.
The interest rate market turns on its heel
The oil price shock has triggered a marked repricing in the interest rate market. Expectations of rate cuts from the U.S. Federal Reserve, which dominated market sentiment just a few months ago, have now been completely priced out. In the euro area, three rate hikes are now priced in for the remainder of the year, and similar movements are seen in the United Kingdom, Norway, and Sweden. Norges Bank has made a clear U-turn and signals up to two hikes this year after significantly revising its rate path upward. The reason is that central banks must prioritize the credibility of their inflation targets, particularly after a prolonged period of above-target inflation. Although the oil price increase is a supply shock that, in theory, calls for a different response than a demand shock, the already strained inflation situation limits the central banks’ room for maneuver. The result is an interest rate environment that in a short time has shifted from a tailwind to a headwind for both growth and markets.
The road ahead
Despite a turbulent March, there are several factors suggesting a more constructive outlook going forward. History shows that energy shocks rarely last, and negotiations between the parties point toward gradual de-escalation. Fiscal measures and tax cuts continue to support growth, while central banks have shown that they adapt quickly when conditions require it. Corporate earnings have remained resilient through the turmoil, and the reporting season confirms that companies continue to deliver. The Oslo Stock Exchange has moved against the trend with renewed strength from the energy sector, and the underlying growth drivers remain intact. For long-term investors, equities therefore still appear to be an attractive option for capital allocation.