Morgan Stanley Says Protracted Hormuz Talks to Keep Oil Prices Firm

Morgan Stanley said negotiations between the U.S. and Iran over the Strait of Hormuz are unlikely to be resolved quickly, with uncertainty over crude supply set to persist.

In an Aug. 13 report, the bank said the talks will probably become a drawn-out process marked by partial agreements, implementation checks and repeated renegotiations.

The two sides signed a memorandum of understanding in mid-June to negotiate commercial transit through the Strait of Hormuz, a rollback of U.S. maritime blockade sanctions and Iran's nuclear program. Iran has linked a full reopening of the strait to a broader agreement that includes lifting the blockade, easing sanctions and compensation. The U.S., by contrast, continues to oppose preemptive concessions.

The sequencing of sanctions relief and the nuclear issue remain core sticking points. The U.S. wants to ease sanctions in stages as negotiations progress, while Iran is seeking guarantees that any relief will not be easily reversed. Differences also remain over uranium enrichment levels, existing stockpiles and the International Atomic Energy Agency's verification framework.

Morgan Stanley said the bigger focus should be on whether maritime transit returns to normal, IAEA inspectors retain access, sanctions are eased and military restraint holds, rather than on whether the talks collapse. Both sides have incentives to avoid a return to full-scale war, but the negotiation process itself is expected to remain uneven and volatile.

The bank maintained a bullish view on oil, saying uncertainty over crude supply through the Strait of Hormuz is likely to keep the global market relatively tight compared with the period immediately after the June memorandum was signed.

For U.S. stocks, Morgan Stanley identified another sharp jump in oil prices as the main near-term risk. Still, it said the Federal Reserve would need a much larger inflation shock than markets currently expect to resume raising interest rates, and it expects the Fed to keep rates unchanged this year.