Outlook
Expectations are running high that the IEA will propose a record release of oil from reserves and everyone involved will rush to make it happen. The FT reports Japan is first in line. Then the debate will start about how long the world can hold out on reserves. The 400 million barrels compares to 182 million released after the Ukraine invasion in 2022. This time, Reuters reports Goldman Sachs had estimated the 2022 size would offset 12 days of an estimated 15.4 million barrel per day export disruption in the Gulf. Presumably nearly double that amount would give us 20+ days. T
Talk about guessing. Separately, Bloomberg reports that closing the Strait results in a loss of 7 million bdp. Another source has 11-16 million bdp. This is the kind of uncertainty that is disruptive and hysteria-promoting all on its own.
The oil crisis is the dominant theme and will remain the dominant factor for all sorts of assets, including the dollar, until it is resolved. A worst-case scenario: the new ayatollah will re-open the Strait of Hormuz only if the US gives it Something Big. In public. As thing stand today, Trump had a meltdown on the news that Iran had placed mines in the Strait and said Iran would be attacked “at a level never seen before” unless the mines were removed. He also said the US Navy could escort tankers willing to sail through the Strait if necessary. Reports have it that shippers have asked for military accompaniment through the Strait and been refused.
It’s sad but true that we can’t discover what is going on by watching the White House. They lie, they obfuscate, and in the end, do not know what’s going on. To get a grip on any real progress, we need to read Al Jazeera and listen for what Iran, Israel and other ME names are saying. And in the end, the only thing that matters is traffic resuming through the Strait.
The Strait is not “international waters” but rather divided between Iran and other Gulf states, including Oman at the tip. Those with a claim on the Strait may allow US and/or European ships to protect tankers, but oil shippers refuse until a clear deal can get made. And Iran says it won’t make any deals with Trump because he can’t be trusted. Maybe Macron?
Perhaps if Trump gets mad enough, he will postpone chickening out. Someone has to tell him that Iran is not like trade partners who bowed and accepted whatever tariff compromise was offered when Trump was chickening out on that front. Iran has made it clear it won’t accept surrender/withdrawal. It really has declared war on the US. Now Trump is stuck in a situation he can’t bully or talk his way out of. He can retreat but Iran will keep going. This may be good news for the pro-democracy Iranians but terrible news for the rest of us, because the cost will be high.
As we say all too often, the dollar doesn’t follow the 10-year yield religiously, but follow it does. At 7:10 am ET yesterday the yield was 4.125%. By noon, it was 4.109%. Then by 7:10 am again today, it was back to 4.17%. We seldom see gyrations in the yield this big over such a short time.
The oil crisis is going to push inflation higher and the bond gang wants that cushion. Foreign bond buyers not only want the cushion, but a premium for putting their money into a country run so badly, if loudly, by an erratic incompetent. Don’t ask when this happens; we need to see how the Iran war plays out first. But it is inevitable.
Forecast
It’s betting, aka gambling. We don’t like to admit it or put it upfront, but speculation is a big part of FX trading, indeed all trading. It’s not all grinding economics and pin-striped bankers and bow-tied professors. All the same, CPI today and PCE inflation on Friday are relevant in the context of comparisons with a year ago, when inflation was starting to fall.
Politically, Trump takes that hit and it will get worse as the Iran war proceeds. If we were to see Trump TACO on Iran, the gamblers will sell oil and gold, but that will be short-sighted, since Iran is not surrendering. It can harm the West in a dozen ways even if the Strait is re-opened. And the oil shock will not be a one-two punch but rather a vibration through economies from fertilizer to a hundred other things.
It may be glass-half-empty, but we suspect it gets worse again and that drives the yields and dollar back up. It can get worse solely on Trump and his misfits saying dumb and inconsistent things, aka behaving normally.
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