UBS Warns Oil Could Surge Past $90 a Barrel if Iran Conflict Drags On

Oil markets are on edge as UBS analysts highlight the potential for prices to rocket above $90 per barrel if conflict around Iran continues to disrupt shipments through the Strait of Hormuz. This key waterway channels roughly a fifth of the world's oil, so any prolonged interruptions could escalate supply concerns.

The situation has already pushed Brent crude futures up by 4%, nearing $88.85 a barrel, while U.S. West Texas Intermediate crude jumped over 5%, reaching around $85.31 per barrel. The latest spike comes amid worries that ongoing tensions between Iran and joint U.S.-Israeli forces might lead to a complete closure of this critical chokepoint.

In an unusual move aimed at easing the pressure, the U.S. has permitted a temporary 30-day window for India to purchase Russian oil, signaling attempts to mitigate the impact on global energy costs. Additionally, the U.S. Treasury is expected to roll out market interventions targeting energy price stability in the near term.

UBS strategists Mark Haefele and Giovanni Staunovo weighed in through a note, suggesting the current price levels aren't sustainable in a stable market environment. They warned if disruptions or damage to infrastructure continue, crude prices could easily surpass the $90 mark.

The jump in oil prices has sparked fresh anxiety that higher gasoline costs could intensify inflationary pressures stateside, potentially impacting the Federal Reserve's interest rate decisions. This has already nudged U.S. bond yields higher and put pressure on equity markets.

However, UBS adds that energy prices would need to stay elevated for multiple months before significantly denting economic growth or inflation metrics. Should the hostilities settle, their outlook points to Brent crude easing back to a more moderate range between $60 and $70 per barrel.

On the ground, the situation remains volatile with Israel conducting strikes on Hezbollah and Tehran targets, while Iran's Revolutionary Guards retaliate with drone and missile attacks on Tel Aviv. There's little indication yet that either side is ready to dial down the conflict.

As the Middle East's tensions ripple through commodity markets, the oil sector braces for continued uncertainty around supply routes and pricing volatility. The oil price story is far from over.