U.S.-Iran Truce: What’s Next?

Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist. Today: how the latest energy shock is rippling across every major asset class.

It’s Thursday, April 2nd, at 10am in New York.

Right now, the markets aren’t just reacting to oil – they’re being shaped by it. The path of energy prices is quickly becoming the lens through which investors interpret everything else: growth, inflation, policy, and ultimately risk appetite. And depending on where oil settles, the market story could look very different from here.

The starting point is simple: the baseline for energy prices has shifted higher. If tensions ease, our Chief Commodities Strategist, Martijn Rats, expects oil to settle around $80 to $90 per barrel in 2026, quite a step up from what we saw in 2025. If constraints persist, that rises to $100 to $110 per barrel. And in a more extreme scenario – where supply disruptions intensify – oil can reach $150 to $180 per barrel.

Now, at those higher levels, the impact becomes nonlinear. Oil stops being just an inflation story and starts weighing directly on demand and growth. That’s why we see the current environment as binary: markets either revert to their pre-shock trajectory, or they begin pricing in a much tougher mix of tighter policy and weaker growth.

To make sense of this, we frame the outlook through three scenarios.

In a de-escalation scenario, supply disruptions ease quickly and oil stabilizes in that $80 to $90 per barrel range. Markets effectively breathe a sigh of relief. Investors refocus on growth drivers like earnings resilience and AI investment. And equities outperform, particularly cyclical sectors like consumer discretionary, financials, and industrials, while defensives lag. Bond yields fall, as inflation expectations decline. All in all, in plain terms, this is a classic risk-on environment.

The second scenario – ongoing constraints – is a little bit more complicated. Oil stays elevated around $100 to $110 per barrel. Markets can absorb that, we think, but it creates friction. Equities still perform, but with more volatility and less conviction. The S&P [500] is likely to move within a wide 6400 and 6850 range in the near term. Leadership shifts toward higher-quality companies – those with steadier earnings and stronger balance sheets – along with select defensives like healthcare. At the same time, credit markets start to really feel the strain with spreads widening in general under performance.

The third scenario – effective closure – is where the backdrop really changes. With oil above $150 per barrel, the focus shifts from inflation to growth risk. Investors will move into what we call a ‘recession playbook,’ dialing back equity exposure and increasing allocations to government bonds and cash. Defensive sectors like utilities, telecoms, and energy take the lead, as markets begin to price in a higher risk to the earnings cycle. Credit conditions tighten sharply, with high-yield spreads potentially widening materially.

What makes this environment especially challenging is how everything connects. In a typical cycle, bonds help offset equity losses. But in an oil shock, that relationship can break down because inflation is rising at the same time growth is slowing. That’s what we usually call a stagflationary setup, and it makes diversification harder just when investors need it most.

Currencies are reacting as well. In a more severe shock, the U.S. dollar strengthens, with EUR/USD potentially falling toward 1.13, while safe-haven currencies like the Swiss franc outperform. In a de-escalation scenario, EUR/USD could move back above 1.17 as risk sentiment improves.

 Importantly, markets have adjusted over the past month. Equity valuations at one point was down about 15 percent  on a forward price-to-earnings basis,  suggesting in a large part of the risk was being priced in. At the same time, sentiment has improved from deeply negative levels, especially over the last few days, even as volatility remains closely tied to oil.

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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Martijn Rats: I'm Martijn Rats, Head of Commodity Research at Morgan Stanley.

Andrew Sheets:  And today in the program: Oil flows through the Strait of Hormuz remain restricted. The implications for global energy markets and what may lie ahead.

It's Wednesday, April 1st at 2pm in London.

So, Martijn, it's great to sit down with you again. Three weeks ago, we were having this conversation; a conversation that was a little bit alarming about the scale of the disruption of the oil market with the closure of the Strait of Hormuz, and how that could have ripple effects through the global economy.

Three weeks later, oil is still not flowing. What is happening? And what has maybe surprised you? Or been in line with expectations over the last couple of weeks?

Martijn Rats: Yeah. Many things have been in line with expectations, in the sense that we're seeing the effects of the closure of the strait the earliest in regions that are physically the closest to the strait. So, we saw the first examples of physical shortages in, say, the west coast of India.    From there on it's reverberated throughout Asia .

 Also in Asia, we're seeing the type of prices that you would expect  . Bunker fuel for shipping, somewhere between $150 to $200 a barrel. Jet fuel over $200 a barrel. Naphta going into Japan; naphta normally trades well below the headline price of Brent. Now $130 a barrel, that's more than double what it was in February.

So, those things tell the story of this historic event. What has been surprising on the other end is how slow the reaction has been in many of the oil prices that we track the most. Like…

Andrew Sheets: The numbers people will see on the news. You know, it's $100 a barrel maybe as we're talking.

Martijn Rats: Yeah. It's strange to see jet fuel cargoes in Rotterdam more than $200 a barrel, but then the front month Brent future only trading at [$]100. That spread is historically wide and very surprising. But look, there are some reasons for it. The crude market had more buffers. There are a few other things. But how slow Brent futures have rallied? That has been somewhat surprising.

Andrew Sheets: But you know, from those other prices you mentioned, those prices in Asia, those prices in Rotterdam that are maybe higher than the numbers that people might see on the news or on a financial website. Is it fair to say that in your mind that's sending a signal that this is a market that really is being affected by this? And being affected maybe in a larger way than the headline oil price might suggest?

Martijn Rats: Oh, clearly. Look, the oil market is full with small price signals that tell the story of the underlying plumbing of the oil market. So, you can look at price differential. So, physically delivered cargoes versus financially traded futures. West African oil versus North Sea oil. Brazilian oil versus North Sea oil. Oil for immediate physical delivery versus the futures contract that trades a month out. And many of those spreads have rallied to all time highs. That is no exaggeration.

And so, in an underlying sense, the stress in the market is clearly there. It is just that in front of Brent futures, which is the world's preferred speculative instrument to express a financial view on oil. Yeah, there the impact has been slower to come. But you're now seeing a lot of Asian refineries bidding for crudes that are further away in the Atlantic basin.

So, demand is spreading to further away regions. And that should over time still put upward pressure on Brent.

Andrew Sheets: In our first conversation, you know, you had this great walkthrough of both just putting the scale of this disruption in the Strait of Hormuz into the global context. How many barrels we're talking about, how that's a share of the global market.

Maybe just might be helpful to revisit those numbers again. And also, some of the mitigation factors. You know, we talked about – well maybe we could release reserves, maybe some pipelines could be rerouted. Based on what you're currently seeing on the ground, what is this disruption looking like?

Martijn Rats: Yeah, so to put things in context, global oil consumption is a bit more than 100 million barrels a day. That number lives in a lot of people's heads. But if you look at the market that is critical for price formation, that's really the seaborne market. You can imagine that if, say you're in China, and you have a shortage. But there is a pipeline from Canada into the United States – that pipeline's not really going to help you.

What you need is a cargo that can be delivered to a port in Shanghai. So, the seaborne market is where prices are formed. That is roughly a 60 million barrel a day market, of which 20 million barrels a day flows through the Strait of Hormuz. So, for the relative market, the Strait of Hormuz is about a third. It's very, very large.

Now, out of that 20 million barrel a day that is, in principle, in scope, there is still a little bit of Iranian oil flowing through. That continues. They let their own cargo through. Then Saudi Arabia has the East-West pipeline. They can divert some oil from the Persian Gulf to the Red Sea. That's about 4 million barrels a day, incremental on top of the flow that already exist on that pipeline. The UAE has a pipeline that can divert half a million barrel a day.

But you are still left with a problem that is in the order of 14-ish million barrels a day. You're going to have some SPR releases to offset that a little bit. But global SPRs can flow maybe 1 to 2 million barrels a day. You're very quickly left with a double digit shortage – and that is historically large…

Andrew Sheets: And just to take it to history, I mean, again, if we were placing a 14 million barrel a day disruption in the context of some of these historical oil disruptions that people might have a memory of – what is the relative scale?

Martijn Rats: Yeah. This is at the heart of why this is such a difficult period to manage. Like, normally we care about imbalances of 0.5 to 1 million. That gets interesting for oil analysts. At a million, you can expect prices to move. If you have dislocations in supply and amount of, say, 2 to 3 million barrels a day, you have historically epic moves that we talk about for decades, literally.

Like in 2008, oil fell from $130 a barrel to $[]30 on the basis of two to three quarters of 2 million barrel a day oversupply. In 2022, around the Ukraine invasion, oil went from 60-70 bucks to something like [$]130 at the peak on the basis of the expectation, but not realized. This was just an expectation that Russia would lose 3 million barrels a day of productive capacity. And so, 2 to 3 million barrels a day normally already gets us to these outsized moves. And so, this event is four, five times larger than that. That means we don't have historical reference for what's currently happening.

Andrew Sheets: I guess I'd like to now focus on the future and maybe I'll ask you to summarize two highly complex scenarios in a[n] overly simplified way. But let's say tonight we get an announcement that hostilities have ceased, that the strait is open, that oil can flow again. Or a second scenario where it's another three weeks from now, we're having this conversation again, and the strait is still closed.

Could you just kind of help listeners understand what the energy market could look like under each of those scenarios?

Martijn Rats: Yeah. So maybe to start off with the latter one. Because from an analytical perspective, that one is perhaps a bit easier. Look, if the Strait stays closed, at some point, consumption needs to decline.

Andrew Sheets: Significantly.

Martijn Rats: Yeah, significantly. We need demand destruction. Now that's easier said than done. Who gets to consume in those type of environments – are those who are willing to pay the most. And that means that certain consumers need to be priced out of the market.

We tried to answer this question in 2022, and the collective answer that we all came up with is that you need prices for Brent – in money of the day – $150 or something thereabouts. That is not an exaggeration. Now, let's all hope we can avoid that scenario because that is… You know, that looks like a spectacular price. But that is not a beneficial scenario for anybody in the economy.

The other scenario is more interesting, and it can actually be split in sort of two sub scenarios…

Andrew Sheets: And this is the scenario where actually stuff starts flowing tomorrow.

Martijn Rats: Exactly, exactly. If it completely flows like it always did – sure, we go back to the situation we had before these events. Brent can fall substantially – 70 bucks. Before these events we thought the oil market would be oversupplied. Who knows? True freedom of navigation may be even lower. But, at the moment, that doesn't quite look like that will be the scenario that's in front of us.

What seems to be emerging is an outcome whereby this could deescalate but leave the Iranian regime structurally in control of the flow of oil through the Strait of Hormuz. And if the Iranian regime continues to manage the flow as they currently do – cargo by cargo. Because there are some cargoes trickling out and there is a process that seems to be established for it. There seems to be a toll that seems to be paid.  .

Given that that will then manage 20 percent of global oil supply, that is not the same oil market that we had before. Like all of OPEC spare capacity would be behind this system. Would that spare capacity be available in the case of an emergency? Maybe, maybe not. This is only one of many questions. But if the Iranians stay in control of the strait, we will not return to the oil market that we once knew.

Andrew Sheets: And is that fair to say we might need a higher, long-term oil price? A higher risk premium in future oil prices to offset some of that?

Martijn Rats: Yes. I would say that that is very likely. First, a lot of the supply would be fundamentally less reliable. Second, we would have de minimis effective spare capacity in the system. Thirdly, if this is the scenario we are left with, that creates an enormous incentive for countries to start expanding their strategic storages. And building strategic inventories is like exerting demand. China has built a lot of strategic storage over the last two years. They are now in a better shape than if they hadn't. In the west, we've historically had strategic storage. But India for example, has none. And so, the rest of Southeast Asia, no strategic storage; a lot of strategic storage buying that will is price supportive.

And also, look, the prices that we care about are the price of Brent and WTI, and they are not behind the Strait of Hormuz. They have higher security of delivery. You can totally see how refineries would be willing to pay premium for those crudes relative to others. So, when you add all of that up, it leaves you with a higher risk premium. That people would pay particularly for the crudes that form our perceptions about the oil market,

Andrew Sheets: Martijn, one final question I'd love to ask you about is how the U.S. fits into all of this. You know, you do encounter this perception that the U.S. is energy independent. It produces a lot of oil. It's net energy neutral in terms of its imports-exports. You can correct me to the extent that's correct.

But to what extent do you think it's true that the U.S. is more isolated energy wise from what's going on? And to what extent do you think that that could be a little bit misleading given a global interconnected market?

Martijn Rats: Look, the United States is in a better position than many other countries, that's for sure.  , But the practical reality is also that that is, I would just say, mostly sort of a volume argument, but not a price argument. The United States is a net exporter of oil. But that is a net effect after very large imports and very large exports. It's just that the exports are a little bit bigger than the imports…

Andrew Sheets: So, it's a lot of flow in both directions…

Martijn Rats: There is an enormous flow in both directions and that connects the United States with the rest of the world. In the end, in the seaborne market, there really is only one oil price and we all pay it, including the United States. But nevertheless, relative to other parts of the world, yeah, better positioned,

Andrew Sheets: But still not immune from what’s going on.

Martijn Rats: No, no. We're all connected.

Andrew Sheets:  Martin, it's been wonderful talking with you and while I hope to catch up with you again soon, if we're not talking again in three weeks, it maybe is a good sign.

Martijn Rats: Might be. Thank you, Andrew.

Andrew Sheets: And thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also, tell a friend or colleague about us today.