The oil market currently faces exceptionally high risks. While the U.S. Trump administration seeks peaceful negotiations with Iran, the White House continues to amass military forces in the Middle East. According to U.S. Department of Defense officials, the Pentagon is considering deploying up to 10,000 additional ground troops, including infantry and armored vehicles, to the region to provide more military options. These forces would augment the capabilities of approximately 5,000 Marines and several thousand paratroopers already deployed, with speculation that future operations may occur near Iran and its key energy hub, Kharg Island. Concurrently, traders warn that each day the conflict persists intensifies the energy shock, pushing the global economy, along with stocks and bonds, into greater peril.
As the conflict, which began on February 28th, nears the end of its first month, it is worth examining its similarities and differences with historical geopolitical shocks.
The International Energy Agency stated mid-month that the closure of the Strait of Hormuz has caused the most severe supply disruption in the history of the global oil market. The Strait is a critical chokepoint, normally supplying about 20% of the global daily consumption of 100 million barrels of oil. Currently, tanker traffic through the Strait has dwindled to minimal levels. Although Saudi Arabia has rerouted some supplies via existing pipelines to other export terminals, analysts, including those from Rapidan Energy Group, indicate that up to 10 million barrels per day or more of Middle Eastern oil supply remains obstructed. Threats by Iran to tankers and shutdowns of major production facilities in Middle Eastern oil-producing nations could mean the impact on oil and gas markets will far outlast the conflict's conclusion. Unlike previous shocks that lasted months or longer, the ability of Saudi Arabia and other major crude exporters to utilize spare capacity is highly constrained while the Strait of Hormuz is effectively blocked.
Since the start of the year, the global benchmark Brent crude futures price has surged approximately 80%, even after reports of U.S.-Iran negotiations triggered a significant sell-off. As illustrated in the accompanying chart, the surge in oil prices since the conflict's outbreak at the end of last month—marked by frequent drones and missiles over the Strait of Hormuz—most closely resembles the pattern observed following the outbreak of the 1990 Gulf War. The Gulf War was a regional conflict led by a U.S.-headed coalition of 34 nations against Iraq from August 2, 1990, to February 28, 1991, involving approximately 660,000 coalition troops and 860,000 Iraqi forces. Furthermore, the current oil price increase has already substantially exceeded the surge seen during the 2022 Russia-Ukraine conflict. Prior to the 2022 conflict, the global economy was experiencing a strong recovery from the pandemic, with oil prices starting from a much higher base than at the beginning of this year. It is noteworthy that even though many anticipated crude supply disruptions from the Russia-Ukraine war did not fully materialize, oil prices remained elevated for many months.
This past Thursday, the S&P 500 and Nasdaq indices recorded their largest single-day declines since the U.S.-Israel-Iran conflict began on February 28th. The trajectory of U.S. stocks since the outbreak of hostilities has largely aligned with the typical negative market reaction following geopolitical shocks. Even before the current conflict began, the S&P 500 had experienced a pullback due to concerns that artificial intelligence could disrupt industries like software and financial services. Investors note that high stock market valuations have amplified volatility since the fighting started. Overall, the Gulf War of the 1990s resulted in more significant U.S. stock market pressure than the current situation. In contrast, by a comparable stage in the Russia-Ukraine conflict, the S&P 500 had largely recovered to its pre-invasion level. However, it's important to recall that the 2022 geopolitical shock exacerbated inflation, ultimately leading to lower corporate profits and higher borrowing costs, which contributed to the S&P 500 falling 21% in the first half of that year.
As shown in the accompanying chart, the increase in the 10-year U.S. Treasury yield since the start of the U.S.-Iran conflict is broadly comparable to the increases seen during comparable phases of the Russia-Ukraine conflict and the Gulf War. One key difference is that prior to the 2022 Russia-Ukraine conflict, Treasury yields were at low levels as the Federal Reserve worked to revitalize the post-pandemic economy. This time, uncertain interest rate prospects have left yields already elevated. Despite this, the sell-off in Treasuries has been vigorous, pushing the 10-year yield to among its highest levels since July of last year. Following Iraq's invasion of Kuwait in 1990, the 10-year Treasury yield climbed at an even faster pace, a period when U.S. reliance on foreign energy was significantly higher than it is today.
The United States has committed a substantial share—approximately 172 million barrels—to the largest coordinated release of crude from strategic reserves ever undertaken by International Energy Agency members. This release, drawn from the network of salt caverns along the U.S. Gulf Coast, is slightly smaller than the emergency release authorized by President Biden during the 2022 Russia-Ukraine conflict. By historical standards, both releases are exceptionally large, indicating that the White House is becoming more proactive in utilizing the Strategic Petroleum Reserve to counter price shocks or address economic threats.
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