The Day of Reckoning is Closer Than You Think

Key Points

• CPI jumped to 4.25% for the 12 months to May 2026.
• Crude oil and petroleum reserves are falling at an unsustainable rate of 11 million barrels per day.
• The US and Iran traded air attacks for a second day.
• Iran threatens to close the Strait of Hormuz completely.
• Stocks retreat, and Gold tests support at $4,000 per ounce.

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The US Central Command said its forces launched additional “self-defense strikes” on Iranian military surveillance capabilities, communication systems and air defense sites across Iran that posed a threat to US forces and international commercial shipping.

“The strikes are in response to Iran’s unwarranted and continued aggression.” the statement said. (Reuters)

Iran’s Revolutionary Guards released a statement saying it struck the US air base at Al-Azraq in Jordan with 12 ballistic missiles “to punish the aggressor.”

The IRGC said the attack “destroyed those installations and a large number of fighter jets.” (Reuters)

President Trump promised further strikes if Tehran does not immediately agree to a peace deal. (Reuters)

Promises of an imminent deal have lost all credibility:

President Donald Trump claims a peace deal with Iran is only “two or three” days away, promising it will halt Iran’s nuclear weapons ambitions and immediately reopen the Strait of Hormuz to global shipping despite saying the same thing 37 times in the past. (The Mirror)

Brent crude futures rallied on fears of further escalation.

Oil and petroleum reserves are plunging as the global crude shortage continues.

Analysis from HFI Research highlights that the global shortfall of 11 million barrels per day is being met by drawing from inventories.

The daily shortfall is 11 million barrels shut in by the closure of the Strait of Hormuz, after accounting for Saudi and UAE shipments that are able to bypass the Strait.

The shortage is being met by:

• A cut of 5 million barrels/day in refinery throughput (3 million in China and 2 million elsewhere).
• 2.5 million/day drawn from strategic reserves.
• 3.5 million/day drawn from other crude storage, including crude on the water at the start of the conflict.

HFI points out that the cut in refinery production runs does not reflect demand destruction. End user consumption has hardly changed. The cuts merely kick the can down the road, showing up as a drawdown from inventories of petroleum, diesel, jet fuel, and other end products.

The EIA estimated global strategic crude oil reserves at 2.35 billion barrels at the end of March, excluding Saudi Arabia, the UAE, and Iran. China’s reserves of 1.4 billion barrels seem formidable, but not when compared to a projected global shortfall of 4 billion barrels per year.

Draws from the US Strategic Petroleum Reserve (SPR) have averaged 1.3 million barrels/day over the 35 days to June 5.

Another 900,000 b/d are being drawn from other US inventories (excluding SPR).

If you have the time, Jack Farley’s interview of crude oil specialist Matt Smith at Kpler provides background on the global oil shortage:

CPI & Inflation

Headline CPI jumped to 4.25% for the 12 months to May 2026. Most of the cost pressures are energy-related, while core CPI has a much longer lag.

Monthly CPI has slowed to 0.473% in May, but that still translates to an annual rate of 5.7%.

Energy

Energy CPI grew at an annual rate of 23.5% despite the moderation in crude oil prices as President Trump talked up the prospects of a “peace deal.” We expect high energy prices to drive up CPI as it did during Russia’s invasion of Ukraine in 2022.

Food

The Food sector has a much longer supply chain, with annual CPI reflecting hardly any impact from rising diesel and fertilizer prices… so far.

Monetary Inflation

Our favorite measure of underlying inflationary pressure is domestic credit growth minus real GDP growth. Positive values indicate that credit in the economy is growing at a faster rate than output, creating upward pressure on prices. We exclude the financial sector, which largely acts as a conduit between borrowers and investors. Credit growth reflects growth in the money supply as commercial bank deposits are created by commercial bank lending.

Bank credit grew at an annual rate of 7.3% over the 12 months to April 2026. Real GDP growth was 2.6% for the year to March 2026, and the difference implies an underlying inflation rate of 4.7%.

Stocks

The S&P 500 is retracing to test support at 7000, while falling Trend Index peaks warn of selling pressure.

The Dow is already testing support at its former high of 50,000.

Financial Markets

The Chicago Fed National Financial Conditions Index continues to signal easy monetary conditions, with a May 8 value of -0.502, but the downtrend is slowing.

Financial markets have swung to risk-off, with Bitcoin¹ testing support between 60,000 and 62,000. A break below 60,000 would signal another major decline in risk assets, including stocks.

Treasury Markets

2-year Treasury yields rose to 4.127% after the strong May jobs report. The premium over the Fed funds target range of 3.5%-3.75% indicates that financial markets expect the Fed to hike rates, rather than further cuts.

10-year yields are consolidating above support at 4.5%, suggesting another rally to test 4.75%.

Dollar & Gold

The Dollar has strengthened, with the Dollar testing resistance at 100 as global financial markets expect higher US interest rates.

Gold is testing primary support at $4,000 per ounce. The fall has nothing to do with rising inflation as some headlines suggest — demand for Gold is primarily as a long-term inflation hedge — and everything to do with the fiscal crisis caused by the war in the Persian Gulf. Gulf states have lost oil revenues and, rather than buying Gold, are likely sellers. Major oil importers face large current account deficits, and Turkiye alone has sold more than 20 tons of Gold to stabilize its exchange rate. Iran was excluded from the global financial system and was using Gold transactions to effect international transfers. The war with the US and the US blockade of Iranian ports have left Iran critically short of revenue, and they are also likely selling reserves to keep their government afloat.

Conclusion

Demand destruction for petroleum products has been minimal, and the 11 million barrels/day shortfall caused by the war in the Persian Gulf is being met by draws from strategic reserves and commercial inventories. The current rate of drawdowns is unsustainable, and demand destruction from either fuel rationing or higher prices is the two most likely outcomes.

The global economy is hurtling along at full speed, blissfully unaware of the global oil shock that awaits when oil stocks run low. A timely resolution to the US-Iran conflict is unlikely, and a recession seems inevitable. AI spending will not save us. The global economy runs on hydrocarbons, not petabytes.

We expect inflation to rise, with CPI near 10.0%, as in 2022. Long-term Treasury yields will likely rise to above 5.0%, resulting in a stock market crash.

We expect demand for Gold to remain weak while the Strait of Hormuz remains closed, though strong support at $4,000 is likely as long-term investors accumulate at low prices. Current weakness makes us even more bullish over Gold’s long-term prospects as inflation erodes the Dollar’s purchasing power.

Acknowledgments

• CoinDesk: Bitcoin
• Federal Reserve of St Louis: FRED Data
• CNBC: Brent Crude ICE May’26 Futures
• CNBC: 2-Year Treasury Yields
• HFI Research: Gaslighting the Oil Market

Notes

1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.