Oil to US$150? Oliver and Jennings rate the asset class impact of the US-Iran war

Oil could surge towards US$150, while gold and Australian government bonds are emerging as the key safe havens amid the US-Israel war on Iran.

That’s the view from AMP’s Shane Oliver and Marcus Today’s Henry Jennings, who say the trajectory of oil - particularly via the Strait of Hormuz - will determine how severe the fallout becomes.

Setting the scene, Jennings expects the initial conflict to be relatively short-lived.

“However, the consequences will be long-term. The outcome really depends on who gets to run Iran,” he says.

“If we get a Khamenei look-alike and a similar anti-West ideology, the consequences will be felt for a long time.”

Ali Khamenei, Iran’s Supreme Leader, was killed in the strikes and had been openly hostile toward the West.

Oliver notes geopolitical shocks have become an increasingly regular feature this year, pointing to US “interventions” in Nigeria, Venezuela, Greenland and now Iran.

“Conflict regularly flares up in the Middle East, leading to concerns of a blow to the global economy via a surge in oil prices like in the 1970s and early 1980s,” he says.

“But most of the time oil supply is not affected as key producers are not involved. This time might be different though, resulting in a sharper and longer spike in oil prices.”

Rating the impact on asset classes/macro

Below is their impact scorecard for the next three months. (1 = least impacted, 5 = most impacted)

Oil prices

• Jennings: 5/5 – “Depends on whether [the Strait] gets closed or not. For now, it is open, but no one is running the gauntlet as ships are effectively uninsurable. No insurance, no movement through the Strait. We could see US$100 on a closure.”
• Oliver: 5/5 – Supply disruption could trigger a sharp spike higher.

Australian equities

• Jennings: 2/5 – “We are a haven from global instability and have hard assets together with banks that are not affected by the current PE woes in the US.”
• Oliver: 3/5 – Expects a pullback on global growth concerns.

International equities

• Jennings: 3/5 – Greater exposure to geopolitical and energy risks.
• Oliver: 3/5 – Likely to fall as investors de-risk.

Australian dollar

• Jennings: 3/5 – “USD will be bought on haven demand,” weighing on the Aussie.
• Oliver: 1/5 – Slight negative, though higher energy prices may provide some offset.

Fixed income

• Jennings: 4/5 – “Flight to safety from international investors will push yields down,” though higher oil complicates the inflation outlook.
• Oliver: 2/5 – "Government bonds to get a boost from safe haven demand, bad for credit."

Inflation

• Jennings: 4/5 – “Higher oil prices are not great for inflation.”
• Oliver: 2/5 – Headline inflation would rise, but weaker demand may limit underlying pressures.

Gold

• Jennings: 5/5 – “Clearly a winner. It always is,” though some safe-haven demand may already be priced in.
• Oliver: 5/5 – Strong safe-haven demand likely to push prices higher.

Base case and bear case

So what are the worst-case outcomes for markets? Oliver lays out two scenarios.

#The base case - limited conflict (65% probability)

“Our base case is that the war remains limited, with Trump likely finding a way to declare victory in the next week or so - presumably on the basis that he has again neutralised the threat from Iran and will leave it to the Iranian people to sort out," he says.

Oil prices could still rise in the short term, threatening equities, before easing.

“That would be a selling opportunity in oil and a buying opportunity in shares.”

# The high-risk case – major oil disruption (35% probability)

However, the conflict could escalate. Iran could fight on for longer, drawing the US in deeper. The country could descend into chaos, as occurred in Iraq and Afghanistan, potentially requiring US troops on the ground.

“There are few examples of successful regime change from US interventions in recent decades," Oliver says.

In that scenario, oil supplies could be significantly disrupted - conceivably doubling prices to around US$150 per barrel - triggering a sharp fall in share markets.

Oliver notes that oil holding above US$100 would create another inflationary headwind, lifting petrol prices and flowing through to broader input costs.

“A 40-cent-per-litre rise in petrol prices would add about 0.7% to CPI inflation,” he says.

US political situation in focus

Jennings agrees oil could spike to US$100 and beyond, creating voter dissent and investor discontent in the US.

“I would expect any correction to be mild as long as the US and Israel are seen to be winning,” he says.

“Yields will fall as bonds rise. Gold will grind higher, but much of the geopolitical risk is baked in. Commodities will be firm.”

“A correction of more than 5% would be more tied to the US losing momentum and MAGA voters turning, particularly with midterms in focus.”

Portfolio positioning

Jennings says investors should not panic.

“There could be opportunities as long as the US and Israel are seen as winning. Gold, oil, energy. Avoid travel stocks. Insurers could suffer as yields fall. Expect a move toward safe havens - USD and Treasuries. The AUD may remain under pressure.”

Domestic-facing stocks such as Telstra (ASX: TLS) and the banks should be relatively insulated.

Notably, the Marcus Today MT20 portfolio remains 100% in cash. In its Small Cap Portfolio, Jennings says the focus is on gold, resources and selective tech.

“Tech may be sold off again, but I suspect we may have seen the bottom in ASX tech stocks," Jennings says.

Oliver reiterates his long-standing message: volatility is the price investors pay for higher long-term returns.

“It’s very hard to time market moves, so the key is to stick to an appropriate long-term investment strategy,” he says.

“Selling shares after a fall just locks in a loss … share falls provide opportunities for investors to buy them cheaply.”