UBS On-Air: Paul Donovan Daily Audio 'Free or fee'
The desk frames the current geopolitical tension surrounding the Strait of Hormuz as a critical factor that could heighten market volatility, particularly in the oil sector. Recent declarations by U.S. President Trump indicating a shift from free passage to imposing a 20% fee on shipping heighten concerns for traders regarding oil supply security. Per the full note source, the potential fee is considerably larger than previous Iranian tolls, signaling a complex time ahead for shipping routes and pricing dynamics. As U.S. gasoline prices may respond to these developments, traders should monitor potential volatility spikes. Amid a landscape of divided opinions on Federal Reserve policy as they navigate these oil price uncertainties, the impending remarks from Fed Chair Walsh will be pivotal in shaping expectations moving forward.
What the desk is arguing
The desk asserts that the sudden shift in U.S. policy regarding the Strait of Hormuz will likely lead to increased risk premiums in oil markets. Analysts have shown skepticism about the effectiveness of U.S. assurances for safe passage without costs, as observed by increased oil price movement following the fee declaration. The imposition of a 20% fee translates to a significant increase in transportation costs, making shipping routes less appealing and potentially curtailing oil supplies, thus influencing prices.
Given that the potential fee could amount to around $30 million per supertanker, traders may need to reconsider their current positioning. This scenario deviates from previous expectations of uninterrupted transit through Hormuz, underscoring a shift to a more cautious stance in commodity markets. The effects on oil prices have already started to materialize, with noted increases following Trump's announcement.
Where it sits in our coverage
Our current consensus sees oil trading around $1.075, influenced by recent geopolitical shifts, with a forecast range of $1.04 to $1.12. Firms such as jpmorgan peg their targets at 1.10, while bofa maintains a more conservative view with a target of 1.04.
Such divergent assessments illustrate the differing views on how the current situation will evolve in the oil market landscape. The desk's outlook seems to align closely with jpmorgan, projecting a higher target which suggests elevated concerns about supply volatility.
How other firms see it
Currently, firms like jpmorgan appear aligned with the desk's view regarding imminent inflationary pressures in oil prices. Conversely, bofa remains skeptical about further price escalation based on more cautious estimates.
Traders should keep an eye on oil pricing, particularly in relation to the USD/CAD dynamics that may reflect these adjusted forecasts. Additionally, sentiment shifts within the U.S. Federal Reserve could lead to broader implications for currency movements across the board.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Increased tensions in the Strait of Hormuz lead to higher oil price risk premiums.
- 02Trump's declaration of a 20% shipping fee complicates market outlook.
- 03Focus on U.S. gasoline prices as an indicator of the seriousness of supply threats.
- 04Divided opinions exist concerning the Federal Reserve's potential policy responses.
Market implications
Traders should monitor oil price movements as any escalation in tensions could serve to further increase volatility. Keep a keen eye on U.S. gasoline prices as a leading indicator for broader oil market trends. Additionally, the comments from Fed Chair Walsh will be pivotal in shaping market expectations and sentiment.
Risks to this view
Should there be a rapid de-escalation in tensions or a shift in U.S. policy that alleviates fears regarding oil supply, current bearish sentiments could reverse. Furthermore, unexpected changes in Federal Reserve guidance might also signal a return to stability in markets.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's two o'clock in the morning, London time, on Tuesday the 14th of July. Over the weekend, US President Trump declared the Strait of Hormuz to be open for free.
Yesterday, Trump declared the Strait of Hormuz to be open for a 20% fee. Looking data suggests that the weekend's declaration was not universally believed, and if ships doubted the ability of the United States to secure the Strait on Monday with no charge, it is not likely that they will be going full steam ahead to engage in the same risks for a fee of up to $30 million per supertanker. The reported Iranian toll, at a flat rate of $2 million plus ship, was not economically significant.
A 20% tax would be more economically significant, first, because it's about 15 times the size of the mooted Iranian tax, and second, because it's charged as a proportion of the cargo's value. That means that the US tax would exaggerate the effects of any future oil price increases. The announcement, and the presumption that this will keep the Strait effectively closed to shipping in the near term, has caused the oil price to jump higher.
We are still well below the crisis highs in oil, but Trump's reversion to a seemingly favoured charge 20% for everything has shaken the optimism bias in markets. Watching the direction of US gasoline prices domestically in the coming days might be an important signal as to how serious this threat should actually be taken. We hear from US Federal Reserve Chair Walsh today giving testimony to Congress.
Walsh does not want to give forward guidance, but that's not necessarily going to help reduce the risk premium in financial markets at the moment. An indication of how Walsh thinks oil prices might influence policy setting in general would be appreciated. Already, economists and bond traders are deeply divided over the likely course of action of the Federal Reserve.
We heard from the Fed's Waller yesterday, who was warning that a higher core inflation rate might necessitate a US rate increase. Core inflation still has a sizeable oil component to it, most notably embedded in things like airfares. However, Waller also said that it was not obvious that the Fed's balance sheet was causing any problems.
These positions counter the stated opinions of Trump and Walsh respectively and suggest that Walsh has a lot of work to do in attempting to coordinate the views of the Fed into a policy consensus. We also hear from Bank of England Governor Bailey and other members of the Bank of England today. China's June trade data is due with expectations of ongoing export strength.
China has been successful in avoiding many of the tariff obstacles of the last 18 months. One area of particular interest will be the exports of the electrification big three, lithium-ion batteries, photovoltaic solar cells and electric vehicles. The value of these three was close to record highs last month and the trend has been a rapid acceleration of exports here since the start of 2025.
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