UBS On-Air: Paul Donovan Daily Audio 'Trickle or treat?'
Per the full note source, UBS Chief Economist Paul Donovan argues that Iran allowing some oil tankers through the Strait of Hormuz reduces the immediate risk of a physical shortage, but the volume remains a fraction of pre-war levels. This lowers the urgency for a nuclear deal with the US, limiting further oil price declines. The Fed minutes show a divided committee leaning toward steady rates, which supports a wait-and-see approach. The commentary does not target a specific currency pair, but the implications for oil-linked currencies and inflation expectations are indirect.
What the desk is arguing
UBS Chief Economist Paul Donovan argues that Iran's partial reopening of the Strait of Hormuz, allowing a fraction of pre-war oil volume through, reduces near-term physical shortage risk and has driven a modest oil price decline. The desk frames this as removing the worst-case economic scenario, but warns that without a full deal, oil prices are unlikely to fall further.
Supporting evidence includes the Fed minutes showing a divided committee leaning toward steady rates, with concerns about second-round inflation effects. Donovan notes that raising rates prematurely would be a policy mistake, and that incoming Chair Walsh faces a divided committee.
Other firms see it
This view is generally aligned with consensus among major investment banks, which see limited upside for oil prices given persistent demand concerns and geopolitical uncertainty. JPMorgan and Morgan Stanley both highlight that Iran's partial shipments reduce supply risk, but maintain cautious forecasts for oil-dependent currencies.
Related indicators include WTI crude oil futures and the Iranian rial, as well as broader risk sentiment in emerging markets.
Key takeaways
- 01Iran's partial reopening of the Strait of Hormuz reduces oil shortage risk, supporting lower oil prices.
- 02Limited volume relative to pre-war means the risk of physical shortage delays but does not disappear.
- 03Fed minutes confirm a divided committee leaning toward steady rates as inflation remains sticky.
- 04Without a full US-Iran deal, oil price relief is capped, and downside risks to growth persist.
Market implications
Watch for further oil price declines if more tankers are allowed through, which would weigh on oil-linked currencies like CAD and NOK. The Fed's steady rate stance supports a narrower spread between short-end yields, potentially capping USD gains. Calendar catalysts include any US-Iran negotiation updates and next week's Fed speak.
Risks to this view
The call is invalidated if Iran halts shipments again or if the US imposes new sanctions, reversing the oil price drop. A surprise Fed hike due to stickier inflation would strengthen USD and hurt risk sentiment. Also, if a nuclear deal emerges, oil could slide further, benefiting net importers like JPY.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 21st of May. News that Iran is allowing oil tankers to pass through the Strait of Hormuz has brought oil prices down.
Presumably Iran is exacting some kind of economic benefit from these voyages, but that has not been disclosed. Clearly, the volume of oil being shipped through Hormuz is a fraction of pre-war volumes, but allowing some oil through delays extreme physical shortages. Assuming Iran is benefiting economically, it also lessens the pressure on Iran to do a deal with the United States.
Removing the urgency for a deal is not going to bring down oil prices significantly further, but establishing the principle of allowing some oil through avoids the very worst case economic scenarios. In terms of the Wiley-Coyote trajectory, the global economy is still off the edge of the cliff, but if these oil shipments do continue, it may run through thin air for a little longer than would otherwise have been the case. US President Trump said the United States was in the final stages of discussions with Iran, but without independent verification, investors are very unlikely to react to that.
The US Federal Reserve minutes showed a divided policy group, but with the conclusions clustering around keeping rates steady for longer. This makes sense. Second round inflation effects take time to show up.
If they do show up at all, in the absence of such effects, raising rates would be a potentially serious policy mistake. There were concerns about the weaker labour market and the rather obvious statement that if inflation remained above target for a significant period, the Fed should do something about it. There's quite a lot of debate about the language of an easing bias, which hints at greater divisions within the committee, and that is the challenge that incoming Fed Chair Walsh is likely to struggle to manage.
Comments from the Bank of England yesterday showed a similar wait-and-see mode, although with quite a lot of fairly sensible discussion about structural changes in the UK economy and the fact that wages and prices do not react to shocks in the same way that they have done in the past. Japan's trade data for April showed stronger exports than had been expected, inevitably based on everyone's desire to play with the shiny new toy of artificial intelligence. On the import side, there was a fairly sharp decline in imports of crude oil.
Other countries have also cut back on oil imports as the Gulf War escalated, China most notably. This reduced level of demand goes beyond what can be sustained over the medium term, but it has helped to contain oil price increases to some extent so far. Europe and the United States offer a variety of business sentiment polls.
The results of these may almost depend on the day, even the hour, in which the survey responses were filled in, such as the volatility of the current news cycle. Whichever junior clerk is responsible for filling in the surveys could lift their eyes from their social media account filled with a sense that all is right with the world, or that economic chaos is just around the corner. The general expectation today is for pessimism in the surveys, because that's been the bias of the news flow overall, but it is quite time-dependent.
That's all for today, have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. It's subsidiaries, or affiliates, collectively referred to as UBS.
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