US-Iran 'Neither War Nor Peace' May Become New Normal! Wolfe: High Oil Prices Won't Break U.S. Economy

The US-Iran ceasefire framework expires this week, but both sides have yet to find a breakthrough to end the conflict. Wolfe Research believes the 'neither war nor peace' deadlock is becoming more solidified. As long as the situation doesn't suddenly spiral out of control, oil prices may remain at current high levels, and the U.S. economy still has the capacity to absorb the shock.

Wolfe analysts Tobin Marcus, Chutong Zhu, and others noted in a report that the US and Iran have recently formed a pattern of repeatedly escalating tensions followed by brief de-escalations. Neither side is currently able to reach an agreement, but neither appears willing to trigger a more intense war.

If secret crude oil continues to flow from the Persian Gulf, analysts believe current elevated but not yet失控 oil prices can be sustained. Unless there is another major surprise in the Middle East, oil prices may not spiral further out of control.

Strait of Hormuz Nearly Paralyzed, Oil Prices Return to $90

The biggest market uncertainty remains the Strait of Hormuz. Due to shipping companies' fears of attacks, traffic through the strait has nearly ground to a halt.

The UK Maritime Trade Operations office reported on Tuesday that a vessel leaving the Strait of Hormuz was struck by an unidentified flying object. The incident caused engine room damage and crew casualties.

Iran has also sent stronger signals. A senior Iranian official told Reuters that Iran is preparing to shift to a 'full offensive' posture. Relevant authorities must prepare to escalate tensions in the strait and surrounding areas.

Former U.S. President Trump previously stated that Washington would not extend the US-Iran memorandum of understanding. He also claimed that the U.S. had established a secret communication channel with Iran's Revolutionary Guard, though Iran later denied this.

Trump also threatened possible bombing of Oman. Oman is currently attempting to broker an agreement with Iran to reopen the Strait of Hormuz.

As peace prospects dim, Brent crude oil has once again broken through $90 per barrel. Rising energy prices have reignited inflation concerns and raised market fears that central banks may maintain tighter monetary policies.

High Oil Prices, But Not Out of Control: Wolfe Says U.S. Economy Can Withstand

Although Wolfe does not expect a near-term agreement between the U.S. and Iran, its assessment of the U.S. economy has not turned significantly pessimistic.

Analysts believe that rising oil prices not only directly increase consumer burdens, but pose a greater risk by pushing up inflation expectations, thereby driving up U.S. Treasury yields. This, in turn, could raise financing costs for businesses and households.

However, the market has not yet shown clear chain reactions.

Wolfe pointed out that after the US-Iran memorandum was signed, the breakeven inflation rate—a market measure of inflation expectations—remained relatively stable. Since the July FOMC meeting, short-term U.S. Treasury yields have even declined.

This indicates that disruptions to Middle Eastern energy supplies have, at least for now, not significantly increased short-term interest rate pressures.

Therefore, Wolfe believes that even if the U.S. and Iran maintain a long-term 'neither war nor peace' state, as long as the conflict does not escalate further and oil prices remain 'high but not out of control,' the U.S. economy still has the capacity to absorb the drag from higher energy prices.