SSIM: A partial normalization of oil prices would be likely
'The pace [of the Brent oil price increase] has been faster, as the 2022 conflict touched 10% of global production, whereas the Gulf is home to close to 30%,' Elliot Hentov, Chief Macro Policy Strategist at State Street Investment Management, wrote in his latest analysis.
This is a classic stagflationary supply shock for energy importers, which will again require a fiscal counter-response. [...] Bond markets have sharply adjusted to this inflation dynamic for weaker European sovereigns, and to a lesser extent, for the US and Germany as well.
Notably, in 2022, bond yields did not rise until the third week of the war when the magnitude of Ukraine support and European rearmament costs came into vision. If the current crisis persists, we would assume upward pressure on bond yields to continue. Similarly, we would forecast continued USD strength to be maintained as a corollary of America’s energy profile. Both trends are vulnerable to a sharp reversal upon de-escalatory news.
What else to watch for
- Do the Houthis enter the conflict and disrupt Red Sea shipping, now of greater strategic importance due to diverted Gulf oil exports?
- How durable does US political will appear, and what benchmarks would the Trump administration use to declare an end to the engagement?
- Does serious damage to Iranian military and paramilitary forces and material affect morale?
- Is there a risk of damage to critical nonenergy infrastructure in the Gulf, such as desalination plants?
Bottom line
Iran’s success in maintaining sufficient firepower into the Gulf means the war is now morphing into a negative global macro shock (supportive for the USD, gold, and commodities; negative for bonds and equities). That said, it is difficult to envisage the duration of this shock exceeding one to two months. Even in a more prolonged conflict, a partial normalization of oil prices would be likely.