The war between the U.S. and Iran, which began on 28 February, is entering its fifth month. This week, the conflict escalated from military retaliation to a more dangerous phase for investors: using the world’s energy arteries as weapons. Brent crude oil prices surpassed $95 per barrel, the highest in six weeks, increasing about 30% in July alone.
The question is, "When will the war end?" But a more practical question for investment portfolios is whether the cost of continuing the fight is high enough for either side to back down. The answer today is: not yet.
The core of this conflict is not just the nuclear program but the permanent right to collect tolls at the Strait of Hormuz, which channels about one-fifth of the world’s oil. For Iran, this represents huge revenue and long-term leverage, which the U.S. cannot accept. Bombing alone cannot open the strait. A former top U.S. general estimates a ground operation would require 600,000 troops and about one year, which is politically unlikely.
With negotiations failing and military options limited, the main tool is to blockade oil exports to pressure Iran’s economy. As U.S. stockpiles of weapons dwindle—about 30% of Tomahawks and 50% of Patriots have been used—the incentive to shift the battlefield to the economy grows clearer. This war will not end quickly and may expand to U.S. allies in the Gulf, as the Houthis have declared a maritime blockade on Saudi Arabian ports.
Therefore, oil prices now are the "rules" of the game. As long as Brent stays below $100, the cost to both sides remains manageable, so the incentive to continue probing exists. The key factor to watch is the price level.
InnovestX expects the war to persist for some time, with oil prices possibly reaching $100 per barrel and staying there briefly before declining. This is our main view because a two-layer blockade would prevent Iran from accessing essential imports and bring it back to the negotiation table. We maintain our assumption of an average price of $85 this year and about $70 next year. However, the risk is a more prolonged crisis pushing Brent to $105–120, close to Goldman Sachs’ forecast of $120 if Hormuz remains blocked into Q4. If it stays above $105 for more than three weeks, inflation expectations could break limits, possibly forcing the Fed to raise interest rates again.
Recently, U.S. inflation for June was better than expected. The general Consumer Price Index (CPI) slowed to 3.5%, below the anticipated 3.8%, and core CPI was 2.6%, lower than the expected 2.8%, mainly due to a 5.7% monthly drop in energy prices. In summary, inflation has fallen because of oil but may rise just as quickly for the same reason.
Currently, U.S. gasoline prices are about $4.00 per gallon, compared to $3.235 a year ago. If prices stay at this level or higher, people will anticipate rising inflation, creating a cycle causing consumers and businesses to reset prices, making inflation control more difficult.
InnovestX therefore believes that although the Federal Reserve is likely to keep interest rates at 3.63% throughout this year under a moderate scenario, it may signal tightening if oil prices rise. We have already seen 10-year bond yields rise to 4.65%, near the peak during the war in May.
For Thailand, the main impact is on energy costs and purchasing power, with the oil fund bearing the brunt. Currently, subsidies exceed 651 million baht per day, and the fund has a deficit of about 62 billion baht, necessitating a retail price increase of 0.90 baht per liter. The Bank of Thailand views oil-driven inflation as a temporary supply-side factor. We expect interest rates to remain at 1.00% this year, with economic growth around 2.0% and inflation about 1.8%. Offsetting this is the benefit from higher oil prices boosting profits in energy and refinery sectors, which have significant weight in the SET index.
Regarding investment advice, despite global risky assets being pressured by overhang factors such as geopolitical tensions, volatility in global tech stocks, and U.S. tariff risks, InnovestX believes the SET has already absorbed much of this risk. The index still has potential to move up, though upside is limited as previously leading stocks are becoming overvalued, reducing attractiveness.
Therefore, the short-term investment strategy recommends shifting to laggard stocks whose prices have not yet reflected fundamentals with likely good profit prospects, focusing on two attractive investment themes as follows.
We wish investors good luck.
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