[Iran Crisis] UBS: Market Pricing Contradicts Energy Market Pressures, Oil Prices Could Reach $150 per Barrel in the Most Extreme Scenario

International oil prices continue to rise, with Brent crude futures for May surpassing $110 per barrel, raising market concerns about the global economy and inflation expectations. However, UBS believes that the current narrowing of credit spreads, minimal downgrades in earnings forecasts, and continuous inflows into global stock ETFs reflect an optimistic pricing that expects the conflict to be resolved soon, which is in stark contrast to the actual pressures in the energy market, raising concerns that an extended crisis could cause greater impacts.

Energy shocks and tightening financial conditions may trigger economic downturn

The firm believes that if the crisis extends, the combined effect of energy shocks and tightening financial conditions will trigger economic downturn risks, posing significant impacts on global investors.

UBS has outlined three scenarios for the conflict: (1) The conflict resolves in early April, with Brent crude prices briefly spiking to $120 per barrel before retreating, resulting in limited macroeconomic impact, and the S&P 500 index expected to rebound to 7,150 points by year-end. (2) Oil prices peak at $130 per barrel, with global growth declining about 30 basis points from the baseline, and the S&P 500 index dropping to 6,000 points in the second quarter before gradually recovering to about 6,900 points by year-end.

The last scenario is (3) the conflict extends to the end of the third quarter, with Brent crude remaining around $150 per barrel for the year, global growth declining nearly 100 basis points from the baseline, and the S&P 500 index potentially hitting 5,350 points in the second quarter, with a substantial recovery not expected until 2027.

The firm also mentioned that the destructive power of oil prices at $150 per barrel on the economy is roughly three times that of $100 per barrel; if the probability of recession increases by 20 percentage points, the impact could be up to five times as severe.

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