[We have again launched this Iran war post before complete due to wanting to catch market action. And it may a bit telegraphic. Please come back at 8:00 AM EDT or refresh browsers then for a final version]
As I have said, the best hope for ending the Iran war sooner rather than later is an investor revolt. That has finally started in a serious way, with the increase in oil prices over the weekend and the resulting dislocations in financial markets overseas during their Monday trading. The oil price surge to nearly $120 was merely blunted by report in the Financial Times that G7 finance ministers are meeting at 8:30 AM EDT to consider a release from their strategic petroleum reserves of about one-fourth of the total, or 300 to 400 million barrels. By way of comparison, US daily consumption is estimated at 20 million barrels, the EU’s 10 million, and India’;s 6.
And this emergency move would not address the rise in LNG prices due to operation halts in Qatar, nor the cascading effects of a Strait of Hormuz closure on other markets, from fertilizer (as in food production) to industrial chemicals to apparel. One site points out that heavy crude supplies the sulphur for sulfuric acid, which is deemed an essential chemical in electronics manufacture, for instance, in etching chips.1 Similarly, even after the oil-price-calming Financial Times report of an oil reserves release went live, Ipek Ozkardeskaya, Senior Analyst at| Swissquote reported that US natural gas was up 6%.
Bloomberg reported that Trump will address House Republicans at 8:AM EDT, and one assumes the Administration hopes that he can successfully calm rattled nerves and positive reports will leak from that meeting. Given how Trump has been ever more erratic and unhinged from reality, the odds are good that this session will be yet another own goal.
And even if these measures succeed in calming the markets for a bit, the impossible-to-deny underlying deterioration means that financiers will be unable to view the damage to the global economy as short-lived and will reprice assets accordingly. Even if Trump and Netanyahu were to experience a Damascene conversion and decided to stop fighting this week, all that would mean is Iran would halt its attacks. The US and Israel have been so persistently dishonest and duplicitous that Iran cannot trust that a stoppage by the US and Israel was anything more than yet another ruse, intended to get Iran to relax its vigilance.
Iran’s incentives now are to break the will of the US and Israel. That means it will keep the Strait of Hormuz closed until it can force a capitulation of some sort.That may come about via regime change or some other severe reduction in the freedom of operation of both Trump and Netanyahu due to powerful internal factions imposing discipline. But that is a political process and political time moves more slowly than financial time, and here probably also damage-to-the-real-economy time. Keep in mind, as we have explained longer-form in earlier posts, that closure of oil and gas production facilities produces compounding damage. The longer they stay shuttered, the longer it takes to get them back to full operation. The economic damage compounds over time.
To fill in more details, first on the markets front:
Bloomberg stated that Brent crude oil has come close to $119.50 a barrel before falling back (and I saw it in real time as over $119). Bizarrely, the Financial Times did not report the price action accurately:
Brent crude, the international benchmark, leapt 24 per cent in Asia trading on Monday to $116.71 a barrel but later fell back to be up almost 19 per cent at $110.85 after news of the G7 meeting. West Texas Intermediate, the US marker, rose 28 per cent to $116.45 before falling back to around $108, up almost 19 per cent.
Further updates from Bloomberg at 7:00 AM EDT in :
Europe’s Stoxx 50 neared a correction, approaching a 10% drop from its February peak. The region’s bonds faced a steeper selloff than their US counterparts, with traders fully pricing in two European Central Bank interest-rate hikes and raising bets on a Bank of England move. The yield on two-year UK gilts jumped 21 basis points.
The dollar has risen on higher US interest rates and worries about prospects for Asian economies, which are particularly exposed to an energy price shock. The Nikkei dropped by 7% The KOSPI index in South Korea dived by 8% despite its government considering a domsestic oil price cap. Pakistan halted stock trading.
Gold also retreated. We have pointed out that during the crisis, gold prices often took a sudden leg down, which looked like leveraged traders dumping it as their presumed-least-distressed position so as to cover margin calls. The trigger now looks different. Bloomberg said that gold is stuck in Dubai and is “being sold at a discount as grounded flights make it harder to move the precious metal.”
Fresh updates on the Bloomberg live feed are not cheery. In the last hour:
Saudi Arabia Starts Oil Output Cuts as Storage Fills up
Hitting the wire:
• Witkoff, Kushner Visit to Israel Has Been Postponed: Axios
• Witkoff, Kushner Israel Trip Had Been Planned for Tuesday: Axios
• Axios Reporter Cites Israeli Official Familiar With the Matter
But also in the past hour:
Getting some readership on the Bloomberg terminal is a Washington Post opinion column by David Ignatius. He wrote:
“A few senior officials in Israel are starting to voice concern about the escalating, open-ended attack on Iran — and suggesting possible exit ramps that might halt the war before it further damages the region and the global economy.”
Ignatius was clear to note that an official cited wasn’t speaking for Israeli Prime Minister Benjamin Netanyahu, “who said Sunday that in the next phase of the war, Israel wants ‘to destabilize the regime, to enable change.’”
And a bit before that:
Fitch Ratings says the closure of the Strait of Hormuz is likely temporary, regardless of how long the conflict may last.
Erm, this cheery view reflects a lack of perspective on the incentives in play.
Confirmation of our view of the potential downside of continued mayhem in the Middle East:
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1 There are no doubt alternative sources for sulphur, but it would take time to increase production and get them integrated into supply chains