CITIC Construction Investment: Soaring Oil Prices Reshape Asset Pricing

CITIC Securities Research Report states that the unexpected US-Iran conflict has changed the global recovery trades since the beginning of the year. Oil prices surged 35% in a single week, reshaping the main theme of global liquidity and almost triggering a re-pricing of all assets. At the start of the US-Iran conflict, capital markets priced in risk aversion. As uncertainties around the disruption of shipping through the Strait of Hormuz increased, the risk aversion mode gradually shifted to stagflation. The latest non-farm payrolls unexpectedly showed negative growth, coinciding with a surge in oil prices, and the narrative of US stagflation has begun to spread. The Strait of Hormuz involves multiple national interests: US control over the Middle East, energy costs in East Asia and Europe, and the fiscal revenues of Gulf countries, among others. This means that the US-Iran conflict is unlikely to end quickly. However, because the Strait of Hormuz involves multiple national interests, sustained large-scale disruptions are unlikely to keep oil prices above $100 per barrel for long. A more probable scenario is that shipping through the Strait of Hormuz will not return to previous levels, and global oil prices will need to pay a “friction premium.” What truly warrants attention is the medium- to long-term impact of rising oil price levels on the global economy. (People’s Financial News)