Key Points
- We are on the 10th day of a hot war in the Persian Gulf.
- The Memorandum of Understanding is a distant memory.
- Tanker traffic in the Strait of Hormuz has died.
- Brent Crude futures rebounded to above $90.00 per barrel.
- What is different is that China is not cutting oil imports like last time.
Tehran and Washington are doubling down on their standoff over the Strait of Hormuz, as a Red Sea blockade risks shutting another key shipping route amid an expanding war. Days of U.S. strikes have not loosened Tehran’s chokehold over the Strait of Hormuz, a vital corridor for the world’s oil supply, while tit-for-tat strikes have taken the place of a collapsed ceasefire. A tanker came under attack in the strait early Tuesday, near Oman, forcing the crew to abandon the ship on a lifeboat, the British navy’s maritime trade operations center said. Iran said fires broke out on two tankers that passed through an unauthorized route. (Washington Post)
Brent Crude futures have rebounded to above $90 per barrel.
Crude oil tanker traffic through the Strait of Hormuz has come to a halt.
Strategic Petroleum Reserves have fallen by 100 million barrels since the start of the war.
The drawdown of reserves helped to keep a lid on oil prices, but the biggest contributor to low prices was the sharp fall in Chinese oil imports from 12 million barrels/day in March to 5 million barrels/day in early July. This enabled a recovery of imports by the rest of Asia.
What is different this time is a sharp rebound in Chinese imports. If China resumes imports of 10 to 12 million barrels/day, then global demand has to shrink by 5 to 7 million barrels/day, which would likely trigger a global recession.
Gasoline prices in the US are back above $4.00 per gallon.
Refiners’ margins have widened, likely a result of falling inventories of finished product. The 3-2-1 crack spread increased to $68.17 per barrel, above its 2022 peak at $60 per barrel.
10-year Treasury yields climbed to 4.63%, with rising inflation expectations driving yields higher.
The University of Michigan survey of 1-year inflation expectations averaged 4.2% in July, with the 3-month moving average at 4.5%.
2-year Treasury yields anticipate rate hikes ahead, testing resistance at 4.25%, 50 basis points above the Fed funds target range of 3.5% to 3.75%.
Bitcoin1, the canary in the coal mine, continues to test primary support at 60,000. A breach of support would warn of a sharp contraction in financial market liquidity.
However, the S&P 500 is consolidating in a bullish narrow triangle below 7600. Declining Trend Index peaks above zero indicate secondary selling pressure, and a breakout above 7600 would offer a target of 8000.
Gold is consolidating in a narrow rectangle above primary support at $4,000 per ounce. A breakout above $4,200 would signal respect of support, with an initial rally to $4,500.
Conclusion
Ongoing conflict and restricted tanker traffic through the Strait of Hormuz will likely drive Brent Crude above $100/barrel. A resumption of Chinese crude imports at above 10 million barrels/day would drive Brent towards $150/barrel.
Interest rates are rising in anticipation of higher inflation, but the S&P 500 is testing resistance at 7600, and Gold is consolidating above $4,000 per ounce. A sharp rise in oil prices and inflation would be bearish for both in the short-term, but a divergence between interest rates and inflation would be a strong bull signal. Suppression of long-term Treasury yields, through Fed QE or other means, would drive real interest rates below zero, fueling a massive speculative boom in real assets.
Acknowledgments
- CoinDesk: Bitcoin
- CNBC: Brent Crude ICE Sep’26 Futures
- CNBC: 2-Year Treasury Yield
- University of Michigan: Consumer Surveys
- Washington Post: A Red Sea blockade threatens a new front in U.S.-Iran war
- Energy Stock Channel: 3-2-1 Crack Spread
- Macrobusiness: Australia’s fuel warning light just went on
- Javier Blas: Asian Crude Imports
- Energy Headline News: Chinese Imports
- EIA: Gasoline and Diesel Fuel Update
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.