With a peace agreement between the U.S. and Iran imminent, JPMorgan strategist Ward expects oil prices to potentially drop to $70 in the coming weeks. She believes sustained downward pressure on oil prices would reignite the market rotation previously interrupted, providing tailwinds for equities; meanwhile, lower oil prices could create room for central banks to cut interest rates, offering additional support to stock valuations.
Persistently falling oil prices could open new upside potential for global equity markets.
Karen Ward, Chief Market Strategist for EMEA at JPMorgan Asset Management, stated that as a U.S.-Iran deal improves the outlook for crude supply, the ongoing decline in oil prices is likely to reignite the market rotation previously disrupted by tensions involving Iran, creating a 'powerful tailwind' for equities. Ward forecasts that oil prices could fall further to $70 per barrel in the coming weeks, citing the agreement’s potential to boost global crude supply.
According to CCTV News, on the 15th local time, Pakistani Prime Minister Shehbaz Sharif announced that after intensive negotiations, the United States and Iran have reached a peace agreement. This was subsequently confirmed by both U.S. and Iranian officials. The formal signing ceremony is scheduled to take place in Switzerland on June 19. In response to this news, Brent crude prices dropped more than 5% on Monday, falling below $83 per barrel.
Expectations of lower oil prices have quickly transmitted through financial markets, with both equities and bonds rising in tandem, fueling heightened expectations for central bank rate cuts—even though the European Central Bank raised rates by 25 basis points last week due to inflationary pressures. Ward noted that the cross-sector and cross-regional market rotation previously halted by Iran-related tensions is now restarting.
Declining Oil Prices Reshape Market Expectations: From Supply-Driven Dynamics to Asset Rotation
Ward argues that the current decline in oil prices is driven by more than just developments concerning Iran. She points out that cohesion within OPEC is gradually weakening, and Gulf states may be inclined to accelerate monetization of their reserves at current price levels, thereby further expanding global crude supply.
However, market sentiment is not universally optimistic. According to reports, some traders and analysts remain cautious, citing unclear details of the agreement and practical obstacles to resuming shipping traffic through the Strait of Hormuz.
Ward stated: 'The broad-based rotation we witnessed last year—across both sectors and regions—came to an abrupt halt on February 27. Some assumed the market had fully priced in the impact of the Iran conflict, but that wasn’t the case; the entire market narrative had fundamentally shifted. Now, that dynamic is reversing, and rotation along with broader market participation is returning.'
The disinflationary effect of falling oil prices could prompt major central banks to reassess their interest rate trajectories. Ward notes that sustained declines in oil prices would create room for rate cuts, thereby providing additional support to equity valuations.
Editor/Liam