Quick Bite – Markets Settle Despite Israel / Iran War
Monday was a “risk on” day for markets after the previous week was decidedly “risk off”. This means that traders reduced their hedges (like gold, oil, Treasuries, the USD) and were content to buy back into equities. What caused the change in sentiment?
Indications are that the war between Israel and Iran is not going well for Iran. We are starting to see news reports that the Iranian regime is willing to resume talks on their nuclear program if Israel will halt its attacks. Israel now owns the Iranian skies after its repeated strikes on Iran’s air defences, and has decapitated some of the Iranian military leadership. It has struck but not entirely destroyed Iran’s nuclear facilities at Natanz and Fordow, and may still need US assistance to be confident that the program is set back permanently.
But it seems that investors have concluded that this war will not last much longer – perhaps a few weeks at most. Furthermore, Iran does not appear to have the appetite to shut down the Strait of Hormuz, and is wary of giving the US an excuse to join the fray. There has been no significant impact on the movement of vessels through the Strait and no drop in the number of oil tankers transiting.
About 21mn barrels of oil from Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates pass daily through the Strait of Hormuz – the narrow waterway separating Iran from the Gulf states, representing about one-third of the world’s seaborne oil supplies.
Source: Financial Times
Brent crude, the international oil benchmark, rose as much as 5.5% on Monday to more than $78 a barrel, before giving up all those gains to trade down 2.5% just above $72. It has increased roughly 4% since the fighting began last week.
Israel has launched strikes against at least two Iranian gas processing plants and two fuel depots in Tehran. In response, Iran hit pipelines and transmission lines serving Israel’s largest refinery. However, Israel has not targeted Iran’s key oil export terminals on Kharg Island and Tehran has not sought to disrupt shipping through the Strait of Hormuz.
Source: FT
Iran currently produces about 3.2mn barrels of oil a day and exports just over half, almost exclusively to China. While the Iranian regime has historically threatened to block the Strait of Hormuz in the event that the country is attacked, traders are betting that Tehran is less likely to seek to disrupt shipping given improved relations with Saudi Arabia and the need to keep its own exports flowing.
Source: Yardeni Research
Tehran targeted vessels in the strait during the Iran-Iraq war in the 1980s and more recently was accused of attacks on tankers near the strait in 2019. However, it has never been able to completely block traffic. Saudi Arabia restored diplomatic ties with Iran in 2023.
In 2019 Iran was widely believed to be behind a drone attack on Saudi Arabia’s largest oil processing facility that temporarily cut the kingdom’s crude production by more than half and briefly pushed up global oil prices by as much as 20%.
But with its proxies Hezbollah and Hamas virtually destroyed, and the Houthis in Yemen under pressure, Iran is a much weakened player in the region and will not want to provide any excuse for the US to participate in the war.
It is unlikely therefore that the oil price will skyrocket, causing inflation to break out once again, and disrupting the cutting path for interest rates that central bankers are planning. But war is unpredictable, and we should not get either too confident or complacent. “It ain’t over ‘til it’s over.”
