Markets over a barrel

Wall Street just recorded its worst day since the Iran war began, as markets contemplated a shuttered Strait of Hormuz, an escalating tanker war and triple-digit oil. Given that backdrop, however – and indications that the conflict may be far from over despite President Donald Trump’s statements to the contrary – the roughly 1.5% drops posted by the S&P 500, Dow and Nasdaq on Thursday seem like barely a flesh wound. Indeed, U.S. stocks, unlike their Asian and European counterparts, have been remarkably calm during the past two weeks as energy markets have been roiled. Investors may be betting that Trump will eventually pull back to avoid more market pain, the so-called ‘TACO’ trade (“Trump always chickens out”). But the problem is that even if the president does wrap up U.S. involvement in Iran quickly, it may not matter. Given the damage that has already occurred in the Middle East, this may be one TACO too many. The week in oil has been truly historic. It kicked off on Monday with a record-breaking $35 intraday move in Brent crude, as prices neared $120 per barrel only to fall below $90 at one point. Since then, prices have remained volatile, spiking 9% on Thursday to back above $100/bbl amid Tehran’s bombastic threats that crude could reach $200. This occurred even after the International Energy Agency said on Wednesday that its 32 member countries were moving forward with a 400-million-barrel reserve release – the biggest collective drawdown ever. That market response is understandable, though, as this emergency move appears to be little more than a very large Band-Aid. One of the more disturbing elements of this crisis is that no one seems to have any clue how to price it, with the physical market often exhibiting far more pain than paper trading has reflected. It’s telling that an errant social media post from U.S. Energy Secretary Chris Wright was enough to send prices lower on Tuesday. (For an in-depth discussion on the energy market confusion, watch ROI Asia Commodities Columnist Clyde Russell on the Gulf Intelligence podcast.) The region most at risk remains Asia, which imports the vast majority of its energy from the Middle East. The biggest squeezes are in refined fuel products, like gasoline, diesel and jet fuel. In response, the U.S. is now temporarily lifting some restrictions on buying Russian oil and petroleum products. While we don’t know when or how this conflict will end, a few things are clear. One, you can rip up all of those oil supply glut forecasts, and two, you might want to question previous arguments about fossil fuels being inherently more reliable than renewables. U.S. consumers are already feeling the pinch from the energy crisis, with average gasoline prices soaring 20% ‌since the war began to $3.58 per gallon, as of Wednesday. On the topic of price rises, U.S. inflation figures were released on Wednesday, with the consumer price index rising 2.4% in the 12 months through February, unchanged from the prior month, despite a modest uptick in the month-over-month gain. Given that this data predates the outbreak of the war in Iran, markets paid the announcement little heed. Today’s release of personal consumption expenditures inflation data may be watched a bit more closely, as it’s the Federal Reserve’s preferred inflation gauge and is likely to remain well above the 2% target. Speaking of central banks, almost all of the big ones have meetings next week, including the Fed, Bank of England, European Central Bank, and the Reserve Bank of Australia, among others. Only the RBA is expected to move – a hike is expected – but the real news will be the communications. Markets will be keen to hear how policymakers are approaching what is shaping up to be the biggest crisis since the pandemic. Finally, away from the Middle East, investors are increasingly worrying about risks hiding in the opaque private credit markets. JPMorgan this week said it was marking down the value of some loans ‌to private credit funds. Worryingly, parallels are beginning to emerge between today’s private credit tremors and those in U.S. subprime housing that led to the 2007-09 global financial crisis. That certainly doesn’t mean another financial meltdown is around the corner, but it’s a reminder that when exogenous shocks occur, pockets of risk in financial markets are often revealed. For more data-driven insights on markets and commodities, check out Reuters Open Interest. You can learn:

• Why the Iran war may speed up Europe’s gas divorce with Russia
• The lessons from the Ukraine conflict that may embolden ECB hawks
• Whether Europe’s gas demand has been derailed or just dented by the Mideast conflict
• How the oil price shock could be a politically toxic form of redistribution in the U.S.
• Why it may be time for short sellers to make a comeback I’d love to hear from you, so please reach out to me at .