ME – What Matters Matter?
We are probably at the point of maximum Iranian war disruption.
Long oil hedge is being cut 50% and will be sold completely if Brent goes above US$100/bbl.
The reasons:
· Massive naval power being refocused on Gulf shipping security. Soon 3 US Carrier Groups (2 in or next door to Gulf) and a serious EU carrier group in Eastern Med to protect allies and relieve the Gerald Ford which has now transited Suez on the way to .join Abraham Lincoln.
· Rather than convoying (which will happen), the ability to knock out 1 Iranian VLCC (Tehran has 38) for every non-Iranian ship attacked is a powerful deterrent to IRGC ship attacks. That’s a lot better than knocking out Kharg Island, which the US is contmeplating, because tit for tat deterrence leaves the Iranians with motivation to continue to export oil.
· Insurance markets are back in the game – both the US state insurance and the UK P&I 12 (at inflated war risk premiums – but at least cover is available.
· Greed works with shipping rates up nearly 400% for tankers and 100% for dry bulkers since year end Shippers will want ship rather than being floating warehouses. Already the Greeks are on the move.
· Global oil inventories (including Strategic Reserves) could maintain supply for 200 days. I doubt that Iran will sinking many ships in 200 days.
This does not make me optimistic about economies and markets in general. The Iranian regime will remain a smoldering IRGC controlled state. Costs and prices will not go back to where they were. Oil will settle at $75-80bbl. Inflation will rise in everything from supply chains to energy and food. Thus, will create pressure on profit margins. But above all it will mean the end of Central Bank rates cuts (except for politicised non credible). It’s a kind of stagflation grinch rather than Goldilocks.
Lastly, it may be hard for President Trump to get credit for the War even if we “wins” it in his terms. And I do believe the equity market IS Trump. So, if his fortunes decline so will the equity market!