Tag: US-Iran War

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No Happy Ending

Key Points

  • US forces carried out what the Pentagon called “defensive” strikes on missile launch sites and minelaying boats in southern Iran on Monday.
  • Iran’s Revolutionary Guard retaliated with a drone attack on a US airbase on Thursday.
  • Brent crude rallies to $96.60 per barrel.
  • President Trump insists a deal is within reach.
  • Trump allies have voiced opposition to the proposed deal, which they say favors Iran.
  • Trump says he can outwait Iran and that Iranian leaders had miscalculated if they thought ‌the November midterm elections would force him into a deal.
  • Gold and silver fall as prospects for a peace deal fade.

DUBAI/WASHINGTON, May 28 (Reuters) – Iran’s Revolutionary Guard targeted a U.S. airbase on Thursday after the U.S. military carried out what a Washington official said were strikes on an Iranian drone operation near ‌the Strait of Hormuz….

The U.S. official, who requested anonymity to speak candidly about military operations, told Reuters the military shot down four Iranian attack drones and struck a ground control station ​in the port city of Bandar Abbas that was about to launch a fifth drone.

“These actions were measured, purely defensive and intended to maintain the ceasefire,” the official said.

The Islamic ​Revolutionary Guard Corps said it targeted a U.S. base in response to what it described as an early morning U.S. attack near Bandar Abbas airport, ⁠Tasnim news agency reported. The IRGC said it targeted the U.S. airbase from which the attack on the control station near Bandar Abbas was launched, without identifying the base.

Brent crude (July’26 futures) rallied to $96.60 on news of the air strikes.

Brent Crude Futures (ICE July'26)

Crude oil flows through the Strait of Hormuz remain at a trickle.

Oil Tanker Transits Through the Strait of Hormuz

For those hoping the end of the price surge is near, Sultan Al Jaber, the head of the Abu Dhabi National Oil Company (ADNOC), has disappointing news.

“Even if this conflict [with Iran] ends tomorrow,” he said today at an Atlantic Council event, “full flows will not return before the first or even second quarter of 2027.”

US Strategic Petroleum Reserves (SPR) are shrinking, falling from 415 million barrels to 374 million over the past 6 weeks.

Strategic Petroleum Reserves (SPR)

The emerging deal puts off many critical issues to be resolved later and has already exposed the Republican president to fierce criticism — even from some of his own supporters — that Iran’s hardline leaders will emerge from the conflict battered but emboldened. It all comes to a head just as the midterm elections to determine control of Congress come into focus and as Republicans worry that rising costs and fuel prices are darkening the American electorate’s mood.

But Trump on Wednesday dismissed the idea that the upcoming elections would shape his Iran strategy.

“They thought they were gonna outwait me. You know, ‘We’ll outwait him. He’s got the midterms,'” Trump said. “I don’t care about the midterms.”

….The president is also facing scrutiny from Republican allies, including Sens. Roger Wicker of Mississippi, Lindsey Graham of South Carolina and Ted Cruz of Texas, who have said the terms seem too favorable to Tehran.

They’re balking at aspects of the deal that have emerged publicly that they say too closely resemble the nuclear agreement reached with Iran by Democratic President Barack Obama, which Trump scrapped during his first term.(NPR)

Trump faces the risk that higher crude prices cause a similar inflation spike to the 2022 Russian invasion of Ukraine, resulting in a wipeout at the November midterms.

Brent Crude & CPI

Gold & Silver

Gold and silver face increased selling pressure as the sudden drop in oil export revenues forces Gulf States to liquidate reserves, including bullion. High oil prices have also forced Turkiye to enter into an $80 billion gold swap to cover higher import costs without crashing the already-weak Turkish Lira. Russia, for different reasons, is also liquidating gold reserves to help fund its war with Ukraine.

Gold broke support at $4,500 per ounce, signaling a likely test of support at $4,000.

Spot Gold

Silver has retraced similarly, and a break below $70 per barrel would signal another test of primary support at $60. Declining Trend Index peaks warn of continued selling pressure.

Spot Silver

Conclusion

The US war with Iran — and negotiations — will likely continue for months, if not years. Crude oil shortages and high prices are expected to cause an inflation spike ahead of the US midterm elections, resulting in a Republican wipeout in November.

We remain bullish on the long-term outlook for gold and silver, but their current weakness will likely persist until the Strait of Hormuz reopens and oil prices fall.

Acknowledgments

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Jobs Rise but Prices Soar, Growth Slows and Liquidity Tightens

Key Points

  • Non-farm employment jumped by 178,000 in March, well above the expected 60,000.
  • The unemployment rate declined to 4.3%.
  • Growth in aggregate hours worked, however, slowed to 0.4% over the past year.
  • The ISM Manufacturing Prices index jumped to 78.3%, warning of a price shock.
  • Aluminium prices soared to nearly $3,600/tonne due to supply shortages caused by the war in the Persian Gulf.
  • Brent crude closed the week at $109 per barrel, with no end to the Iran war in sight.

The BLS reported a 178,000 increase in non-farm payroll in March, well above the 60,000 forecast. Employment growth has been erratic, averaging less than 15,000 over the past 6 months.

Employment Growth

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Iran: What Comes Next?

Key Points

  • Combined air strikes on Iran by the US and Israel make good media coverage but are unlikely to lead to regime change.
  • An Iranian strategy that prolongs the conflict while increasing the cost to the US and its allies has the potential to frustrate US ambitions.
  • Rising crude oil prices and increased US deficits will likely fuel a sharp increase in inflation.

President Trump succeeded in diverting media attention from his troubles at home, with attention-grabbing headlines about Operation “Epic Fury” in Iran. But does he have a clear end goal? He claims the Iranians have requested talks, but they deny it. So what happens if the Iranians are unwilling to give Trump his media victory?

Predictions of a “short war” typically underestimate the opponent and the unpredictability of war.

Many things in war are unpredictable, but some are self-evident:

  • Israel does not have the manpower to wage a full-scale war against Iran.
  • The US public does not have the stomach for a large war, and US leaders want to avoid putting “boots on the ground” at all costs.
  • US allies in the Middle East are equipped with modern air defense systems that can protect them from most missile and drone attacks, but they don’t have the stockpiles of weapons to endure a sustained barrage over several months.
  • Oil tankers carry 21 million barrels of crude oil through the Strait of Hormuz every day. Four ships have already been damaged. Closing the Straits would halt the flow of 20% of global oil production, causing a massive supply shortage and spike in oil prices.

Crude Oil Flows Through the Strait of Hormuz

Brent crude prices shot to above $80 per barrel on Monday.

Brent Crude

Robin Brooks compares the current price rise to Russia’s invasion of Ukraine in 2022:

Today’s post …. benchmarks the current shock versus Russia’s invasion of Ukraine four years ago. Russia is a massive oil producer and – at the time – markets worried it would get shut out of the global economy. Yesterday’s spike in oil prices was more than three times as big as the rise on Feb. 24, 2022, the day Russia invaded Ukraine. That’s a big shock no matter how you cut it.

Iranian officials say they have closed the Strait of Hormuz. US Central Command says that is not the case. But tanker rates and insurance costs have skyrocketed.

Lloyds List highlights the steep rise in very large crude carrier (VLCC) rates:

BALTIC Exchange indexes for very large crude carriers loading in the Middle East Gulf reached record highs on Monday. Iranian attacks on tankers and insurers’ withdrawal of war risk cover have effectively closed the Strait of Hormuz.

Spot rate strength in the MEG has cascaded through global freight prices, leading to a surge in rates for VLCCs and other tanker segments worldwide.

The Baltic Exchange’s MEG-China TD3C index went parabolic after the outbreak of war, coming in at a record $423,736 per day on Monday, up 94% from Friday.

Crude Oil Tanker Rates

Global Impact

China gets about 45% of its crude oil needs from the Middle East, with 11% from Iran.

Global Oil Trade

  • Russia, as a large oil exporter, would benefit from a spike in crude oil prices. So would Canada and African exporters like Angola.
  • Large oil importers — China, India, Japan, the rest of the Asia-Pacific region, and Europe — would all suffer from a steep rise in crude oil prices.
  • The US is a net oil importer. While less affected than other major importers, the US has experienced steep rises in inflation during past spikes in crude oil prices.

The 1973 Yom Kippur War and the Arab oil embargo caused a massive jump in crude oil prices, with CPI reaching 12.0% (red- RHS). The Iran-Iraq war in 1980 caused an even steeper spike in inflation, with CPI at nearly 15%.

WTI Crude & CPI

During the 1990 Gulf War, CPI rose above 6.0%. However, during the 2003 Iraq War, deflationary forces— from the collapse of the Dotcom bubble and China’s entry into the WTO — helped offset inflationary pressures from higher crude oil prices.

WTI Crude & CPI

Crude oil prices had already spiked in 2021, but Russia’s full-scale invasion of Ukraine in February 2022 lifted annual CPI to 9.0%.

WTI Crude & CPI

US Deficits

The US federal debt is at a precarious 122% of GDP, and budget deficits remain stubbornly high. The US does not have much spare capacity to wage an extensive or protracted war without generating high inflation.

Federal Debt to Nominal GDP (%)

Conclusion

China’s dependence on crude oil imports is its Achilles heel. The country imports 11 million barrels of crude oil per day, and much of that flows through the Strait of Hormuz.

Chinese leaders will be watching the US-Iran conflict with alarm. US control of the Strait of Hormuz would have China at its mercy. China’s blue-water navy is decades away from being able to challenge US naval supremacy in the Indian Ocean. The only effective way for them to intervene in the current conflict would be to supply Iran with advanced weapons that can challenge US naval dominance.

The Iranians have been battered by air strikes before. They know that a full-scale US invasion is unlikely, and that nothing short of that will likely remove them from power. Their best strategy is patience. They can afford to wait the Americans out. Increase the cost of the war and frustrate US efforts to achieve a decisive outcome. Another protracted conflict in the Middle East, with sky-high oil prices causing a steep rise in inflation, will soon sour US public opinion and lead to yet another retreat.

A protracted conflict in the Middle East would also increase US fiscal deficits. Inflation will likely rise, fueled by increased government spending and rising crude oil prices. Higher inflation and further increases in government debt would increase term premia on long-dated Treasuries. High long-term interest rates would raise the cost of servicing government debt and further increase the deficit.

Attempts by the Fed to suppress long-term interest rates, through QE or other means, would further fuel inflation.

Our strategy is to remain heavily overweight in gold and defensive stocks with stable income streams, and underweight long-term financial assets and high-multiple growth stocks.

Acknowledgments

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