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The prolonged closure of the Strait of Hormuz is pushing the Eurozone into recession, as rising energy prices, supply chain disruptions, and weakening global demand are weighing on the economy.
Eight weeks into the war, the global oil market is facing a supply shortage of between 9 million and 9.5 million barrels per day — about 10% of global consumption — due to pipeline rerouting and the release of strategic reserves, according to BCA estimates.
So far, markets have largely ignored the crisis. European stocks have risen 7.8% from their March lows, the euro has recovered against the dollar, and U.S. stocks have reached new all-time highs.
"Only the bond market's behavior reflects the fact that, despite all the ceasefires and negotiations, the Strait of Hormuz remains closed," BCA strategists led by Jeremy Peloso said in a note.
Even if the U.S. and Iran gradually reopen the strait, it would take tankers four to six weeks to reach Europe and Asia once traffic resumes, resulting in a net loss of 250 million to 400 million barrels of supply, according to BCA.
Global visible inventories will reach historic lows, shifting investors' attention from oil prices to the issue of physical supply, the strategists noted.
Europe is less affected by supply through the Strait of Hormuz than Asian economies, but its weak starting position makes it particularly vulnerable.
"The starting point is much lower," BCA wrote. "On the one hand, this reduces the likelihood of a sustained inflationary spiral, but on the other hand, it means that a recession can be triggered by relatively minor economic shocks," the strategists wrote. As a result, the European Central Bank is expected to keep interest rates unchanged.
Commenting on leading indicators, BCA noted that preliminary PMI data for April showed a sharp deterioration in supplier delivery times, repeating the patterns observed in the first months of the COVID-19 pandemic.
Each major supply shock since the beginning of the century has led to a significant reduction in economic activity over a 12-month period, according to the strategists.
For investors, the team recommends increasing exposure to sectors that have historically performed well after oil supply shocks, such as energy, pharmaceuticals, and utilities.
"The time for a relief rally is coming to an end," the strategists said. "The markets will continue to rise for a few weeks before new evidence emerges that the global economy is slowing down."