Iran escalation risk remains, and near-term upside risk in oil and gas prices has not been removed

Overview

This report focuses on the impact of escalation in the Iran conflict and transit risk in the Strait of Hormuz on the global oil and gas market. UBS believes that U.S. President Donald Trump's remarks on Operation Epic Fury did not materially change oil and gas market dynamics: the U.S. has given a 2-3 week action window, but the risks of further escalation, damage to energy infrastructure, and retaliation against regional energy assets remain. The report emphasizes that whether meaningful oil flows through the Strait of Hormuz can resume is the key driver of short-term oil and gas price moves.

Core views

UBS's core view is that as long as the market cannot see a significant recovery in oil flows through the Strait of Hormuz, near-term risk in oil and gas prices remains tilted to the upside. The U.S. stopping its action against Iran is only a step toward de-escalation; what really matters for supply and demand is how quickly Iran allows tankers to pass through the strait. If Iran requires vessels to come from "friendly countries" and charges fees, or if GCC countries do not accept such an arrangement, the resumption of transit could be hindered. The report argues that Iran's control over roughly 14 Mb/d of flows through the Strait of Hormuz is itself a source of market risk.

Analysis framework

The report combines geopolitical scenarios, the Strait of Hormuz flow shortfall, emergency stock releases, and global inventory levels. UBS first estimates pre-conflict flows through the strait, pipeline diversions from Saudi Arabia and the UAE, Iranian flows, and other adjustments to arrive at the shortfall size; it then incorporates strategic stock releases to assess the potential impact of the remaining gap on global inventories and Brent prices.

Methodology notes

• Supply and demand shock analysisEstimation of the Strait of Hormuz oil flow shortfall

  Using pre-conflict oil flows through the Strait of Hormuz as the benchmark, deduct alternative pipeline routes, still-flowing Iranian oil, Iraqi Ceyhan exports, and limited flows permitted by Iran to estimate the shortfall.

  This approach is used to quantify the direct impact of a constrained strait on global oil supply and to further assess the remaining gap after emergency inventory releases.

• Inventory-price relationshipRelationship between Brent prices and global total inventories

  Using the historical inverse relationship between global total inventory levels and Brent prices as the framework for judging price pressure.

  The chart shows that the lower inventories are, the higher Brent prices tend to be; UBS therefore infers that if inventories fall below the lower bound of the range, prices may rise further.

• Rating definitionForecast Stock Return and Market Return Assumption

  FSR is the sum of expected price appreciation over the next 12 months and dividend yield; MRA is the one-year local market interest rate plus 5%.

  This definition comes from UBS Global Research disclosures and is used to explain UBS's equity rating system, but the main body of this report does not provide a single-company rating.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Brent crude

  Directly affected by Strait of Hormuz transit risk and changes in global inventories

  Strengths

  If the shortfall persists and inventories fall below the lower bound of the five-year range, price upside elasticity could be large.

  Weaknesses

  If the conflict cools quickly or oil flows through the strait recover, the risk premium could fade.

  Comparison

  Compared with a well-stocked inventory scenario, the combination of low inventories and strait disruption corresponds to a higher price band.

  Risks

  Political agreements, forced reopening of the strait, emergency inventory releases exceeding expectations, or weaker demand could all weigh on prices.

• Natural gas

  Indirectly affected by Middle East energy infrastructure security and the broader oil and gas risk premium

  Strengths

  An escalation in geopolitical conflict may lift the energy security premium.

  Weaknesses

  The main body of the report discusses crude oil and flows through the Strait of Hormuz more than natural gas, so there is less quantitative evidence for gas.

  Comparison

  Compared with crude oil, the report provides weaker direct data support for the natural gas price path.

  Risks

  Regional natural gas supply and demand, LNG shipping, and substitute supply may cause it to diverge from oil.

• Shares of large global oil and gas companies

  Linked to upside risk in oil and gas prices and upstream earnings expectations

  Strengths

  Higher oil prices usually support upstream cash flow and earnings expectations.

  Weaknesses

  Refining, marketing, and chemicals margins may be affected by costs, demand, and regional price spreads.

  Comparison

  Companies with higher upstream exposure may benefit more directly from rising oil prices than downstream- or chemicals-heavy companies.

  Risks

  Oil and gas price volatility, changes in refining and chemicals margins, exploration risk, and spillover from geopolitical conflict.

• GCC energy assets

  Highly sensitive to transit through the Strait of Hormuz and the risk of regional retaliation

  Strengths

  Saudi Arabia and the UAE have already rerouted part of their volumes through pipelines, cushioning some of the strait disruption.

  Weaknesses

  If regional energy assets are attacked, supply and infrastructure risks would rise sharply.

  Comparison

  Countries with alternative pipeline capacity are more resilient than exporters that rely entirely on strait transit.

  Risks

  Iranian retaliation, militarization of the strait, GCC countries not accepting Iran's transit arrangement, or broader conflict escalation.

Key data

• U.S. action windowNext 2-3 weeksDonald Trump said the United States is very close to achieving its objectives on Iran, but it will continue strong action over the next 2-3 weeks.
• Pre-conflict Strait of Hormuz flows>20Mb/dThe report uses flows above 20 Mb/d before the conflict as the comparison benchmark.
• UBS estimate of current shortfall12Mb/dAfter adjusting for about 6 Mb/d of rerouting by Saudi Arabia and the UAE and for Iranian oil still flowing, the shortfall is estimated at about 12 Mb/d.
• Remaining shortfall after emergency stock releasesAbout 9Mb/dEven after accounting for inventory releases from the U.S., Japan, and other IEA members, the remaining shortfall is still considered very large.
• Potential flow volume under Iranian controlAbout 14Mb/dThe report argues that the real challenge is not just transit fees, but Iran's potential control over about 14 Mb/d of flows through the strait.
• Potential Brent price scenario>150美元/桶If the situation does not improve and inventories continue to decline, UBS believes Brent could rise above $150/bbl.
• Global inventory statusMay be near the 5-year average by end-March, or below the range floor by end-AprilThis judgment depends on whether the disruption lasts through the end of April.

Impact & implications

The investment implication of the report is that if geopolitical disruption persists, oil and gas prices as well as related energy assets may still benefit from a supply-risk premium; however, the upside comes mainly from conflict, constrained transit, and inventory declines rather than from a fundamental improvement in demand. For oil and gas stocks, higher prices may improve upstream earnings expectations, but refining, marketing, and chemicals businesses will still face price volatility, margin shifts, and regional supply-chain uncertainty.

Risks

• Further escalation in the U.S.-Iran conflict, with energy infrastructure brought into the scope of strikes or retaliation.
• Recovery of transit through the Strait of Hormuz slower than expected, or Iran imposing a "friendly country" and fee mechanism.
• GCC countries, the U.S., and allies may take forced reopening actions, creating military escalation risk.
• High volatility in oil and gas prices affects oil and gas company earnings and valuations.
• Volatility in global refining, marketing, and chemicals margins.
• Risks inherent in normal oil and gas exploration operations.
• Different scenario assumptions could lead to major differences in inventory, shortfall, and price outcomes.

What to watch

• Whether U.S. action against Iran is de-escalated or expanded over the next 2-3 weeks.
• Whether Iran attacks regional energy assets, especially after its own energy infrastructure is struck.
• Whether tanker transit through the Strait of Hormuz shows meaningful recovery.
• Whether Iran implements a "friendly country" transit and fee arrangement, and whether GCC countries accept it.
• Whether Saudi Arabia and the UAE can maintain or increase volumes shifted through alternative pipelines.
• The size and duration of emergency stock releases by the U.S., Japan, and other IEA members.
• Whether global oil inventories fall below the lower bound of the five-year range by the end of April.
• Whether Brent prices move toward scenarios of $120/bbl to above $150/bbl.