By: Brady Raanes
What Happens When the Smoke Clears?
At the time of this writing, Brent crude is trading near $115 a barrel. Traffic through the Strait of Hormuz is currently about 70% below regular levels. The International Energy Agency is calling it the largest supply disruption in the history of the global oil market.
There are two scenarios from this point. (1) The war drags out, and oil prices move materially higher, or (2) the war comes to an end sooner rather than later. The first scenario may actually be easier to model. If the war drags out, the Strait remains impaired, and ground troops move in, then we could see $150-$200 oil for a prolonged period of time, leading to a global recession. That’s not the base case… but it’s also entirely possible.
Let’s explore the more optimistic scenario, in which the conflict ends sooner rather than later. What might happen next?
The Oil Snapback
Let's start with the obvious: if the conflict wraps up in the coming weeks and Hormuz reopens, oil prices could fall fast. A quick move back below $100 isn't unreasonable. It wouldn’t even be shocking if prices overshoot to the downside ($80?). At $100+ oil for two or three months, consumers drive less, airlines cut routes, and industrial activity slows. Some of that demand doesn't come back immediately. So paradoxically, oil could actually overshoot to the downside briefly before settling into a new range.
The current price of oil is almost entirely due to the supply disruption premium. Remove the disruption, and the premium should dry up. But that would likely be a short-term knee-jerk reaction.
The U.S. and its allies have released 400 million barrels from their Strategic Petroleum Reserve, the largest coordinated drawdown on record. That oil needs to be replaced, and the refilling process creates a demand floor under prices that lasts for an extended period of time. The government becomes a buyer at exactly the time everyone else is trying to normalize.
Furthermore, shipping and insurance costs don't reset overnight. Even after a ceasefire, tanker companies will demand war-risk premiums to transit the Strait. That keeps the delivered cost of crude elevated even if the headline barrel price drops.
Two Economies, One War
Here's where it gets more interesting. Even a short war at these prices creates very different outcomes depending on where you sit.
Europe is a net energy importer with almost no domestic production buffer. Before the war, the European economy was relatively stagnant, growing at barely 1%. High oil prices feed directly into consumer prices through heating, transport, and industrial inputs. There is very little that European economies can do about it. In response to the oil price shock, the European Central Bank (ECB) has already postponed rate cuts and raised inflation forecasts.
The ECB is in a difficult spot. They can't cut rates to stimulate growth because energy-driven inflation is reigniting, and they can't hike because the economy is already fragile. Even after oil normalizes, Europe likely sees two or three quarters of stagnation or mild contraction.
The U.S. is structurally different. We're essentially energy self-sufficient. While consumers will pay more at the pump, the energy sector benefits from the higher revenue. The net effect on GDP is probably mildly negative in Q2, but unlikely to create broad economic problems for the US (assuming the war ends sooner rather than later). Again, it’s worth mentioning that should the conflict last longer, and oil prices remain sustainable above the current range, would ultimately lead to problems in the US as well. Assuming a short-term resolution, the U.S. is likely to hold up better than the rest of the developed world economically.
Know What You’re Betting on
Energy stocks have been the obvious winner from the war, and a lot of money has piled into the sector. The moment the conflict ends, that “energy trade” may reverse (at least in the near term). It wouldn’t be surprising for energy stocks to give back most of their March gain in short order as investors rotate back into other sectors of the economy.
Meanwhile, the broad market would likely rally in relief, with companies that got hit hardest: airlines, consumer discretionary, travel and leisure making the biggest recovery. We saw that earlier this week when the administration hinted that the way may be winding down. This may feel like a miniature version of the “post-COVID reopening trade”.
But would the relief rally have legs? How quickly would we go back to the “regular” economy? While the Iran conflict has grabbed the headlines, we still have some of the same pre-war problems as before: tariff uncertainty, elevated rates, and stretched valuations in the market. Keep in mind, the S&P 500 is still less than 8% below all-time highs. My hunch is that the resolution to the Iran conflict won’t be clean and tidy, or quickly forgotten. If history is any indicator, the Middle-East drama isn’t likely to abate anytime soon; even if oil begins to flow again.
The Fed's Familiar Trap
The Federal Reserve was already in a difficult spot before the first missile was fired. Tariffs were creating supply-side inflation pressure while growth was decelerating. The war added an energy shock on top of that.
In the short-war scenario, the energy headwind fades, but the Fed's core problem doesn't. They'll try to “look through” the temporary shock. But there are really only two paths:
(1) If inflation expectations settle back down and the relief rally holds, the Fed may hold interest rates steady through the summer and deliver one cut in the back half of 2026. Markets would welcome that.
(2) If inflation proves stickier than expected and inflation expectations drift higher, even by just 25-50 basis points, then the Fed is to hold the current rates through year-end… with the potential for rate hikes in 2027; a scenario that isn’t priced into markets.
I suspect we end up somewhere in between. One modest cut, late in the year, with a lot of hand-wringing along the way.
What It All Means
If the war concludes in the next 3-4 weeks (our base case), then the playbook may look something like this:
Oil retreats quickly. Energy stocks sell off. The broad market rallies on relief.
That rally may be short-lived before the market has to reckon with the same pre-war headwinds: tariffs, rates, and valuation, plus the added drama of the international fallout from Iran.
The U.S. economy holds up better than the rest of the developed world because our structural advantages in energy and technology cushion the blow, but the impact could still create some painful ripple effects.
The Fed delivers modest relief but doesn't ride to the rescue. "Higher for longer" remains the base case.
The biggest risk to this view? The war isn't short. If Hormuz stays closed for another month or two, the scenario gets significantly darker for everyone. While I don't think that's the most likely outcome, the possibility still provides adequate reason to own energy stocks for now.
Any opinions are those of Brady Raanes and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Ð'dInvesting in oil or the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
S&P 500: This index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It consists of 400 industrial, 40 utility, 20 transportation, and 40 financial companies listed on U.S. market exchanges. This is a capitalization-weighted calculated on a total return basis with dividends reinvested. The S&P represents about 75% of the NYSE market capitalization.