WP: Here’s what the stock market might have gotten wrong about the Iran war

Pic.: ‘Times of India’

As stocks soared and oil prices dropped amid an apparent cooling of tensions between the United States and Iran, it may have left the impression that the energy shock that rattled the world would quickly fade, along with the risk of sending the global economy into recession.

The optimism may have been short-lived. On Saturday, Iran’s military announced it would reimpose restrictions on the Strait of Hormuz, throwing the critical waterway’s status into doubt, ‘The Washington Post’ notes.

The uncertainty highlights that beneath that surface, a starkly different reality is unfolding. It is defined by disrupted supply lines and damaged infrastructure, sparking increased concern among the people who produce, transport and depend on energy.

Even investors warned in interviews that it masks deep, underlying problems that threaten a reckoning in the not too distant future.

“We know supply chains are breaking down in Asia and even Europe,” said Ritesh Jain, founder of the investment firm Pinetree Macro. “We know a correction is eventually coming. But everybody wants to live the present moment. People are just saying to themselves, ‘They will solve these issues. And if they don’t get solved, we will sell then.’”

“We have to dance while the music lasts and hope you are near the exit door when it stops,” he said. “I am in that exact situation, despite talking to people in the background who know something is going to break.”

A disconnection

That disconnect between what the market is signaling and what is actually happening is increasingly shaping the global economy. As investors and the trading algorithms they rely on react to headlines and hints of diplomatic progress, analysts warn they are overlooking red flags around what is coming in the weeks and months ahead. It has led some of the world’s leading economic voices to warn that complacency is misplaced, including the head of the International Energy Agency and officials at the International Monetary Fund.

Europe is at risk of running out of jet fuel within six weeks. Fertilizer prices have spiked so high that they could force food prices up into next year. There are shortages of key ingredients to make not just products like surgical masks and toys, but all plastics — meaning the cost of any product with plastic packaging could be going up. Factories in countries such as Vietnam and Bangladesh that U.S. corporations rely on to make products are so crushed by soaring energy prices that they are at risk of shutting down.

The market response seems to be driven to a “fog of war”

As product inventories were exhausted, energy reserves tapped and government assistance for displaced workers depleted, the pain manifested itself in financially punishing aftershocks that ricocheted around the globe.

Many connected to the oil industry are puzzled by how cavalierly traders and investors are responding to a global disruption that will not be remedied quickly, regardless of what diplomatic breakthroughs happen in coming days. And they say Iran’s announcement that the Strait of Hormuz — a global choke point for about 20 percent of the world’s oil and natural gas — would be conditionally reopening is an incremental step, not the breakthrough lower oil futures suggest. Iran made clear it will only be permitting ships to pass through selectively and on certain routes. The narrow strait is still littered with mines. The U.S. is not lifting a military blockade of shipping traffic.

The erratic market response seems to be driven to a “fog of war,” where traders, unclear on the U.S. objectives and willingness to prolong battle, are guided by a presumption that President Donald Trump is scrambling to find an off-ramp from the conflict. The confusion has his firm’s investor clients treading nervously, cutting their bets on oil markets. That much is underscored by the unprecedented spread between the amount buyers are paying for a barrel of oil for use right now — which in some parts of the world has soared past $140 — and the price traders are paying for a barrel of oil that would be delivered months from now, which on Friday dropped below $90.

“There is a disconnect between what the markets look like and what is actually happening in the world”

The danger is that it is all happening while the massive global energy disruption has not been resolved. Its economic fallout has still not been fully felt. The further stock prices diverge from economic realities, the steeper the risk of a reckoning.

“There is a disconnect between what the markets look like and what is actually happening in the world,” said Tibor Besedes, a professor of economics at the Georgia Institute of Technology. “The markets seem to be pricing this as a temporary shock even though people in the oil sector say this will be long term. It is not as simple as opening the faucet to get oil flowing again. I don’t understand why every time news comes out that we might have a ceasefire, the markets react this way. It is like investors do not realize we are still in a war.”

Energy infrastructure in key regions has been damaged, in some cases severely. Critical shipping routes face heightened risks, and the logistics of moving oil and gas around the world have been derailed in ways that cannot be quickly fixed.

Repairs to damaged facilities can take far longer. Industry officials know Gulf state production facilities have suffered significant damage, but they have not been able to tally the extent of it yet. Repairs won’t begin until bombs stop dropping for good.

“We’ve already seen tremendous damage to Gulf energy infrastructure,” said Amir Handjani, a board member at the nonprofit Quincy Institute. “The markets are signaling they can just lean on reserves while it is fixed. But what if there is another round of fighting and Iran launches more attacks on that infrastructure? You could be talking about enough supply disruption to give the global economy a stroke.”

Guided-missile destroyer USS Spruance intercepted an Iranian-flagged cargo vessel attempting to sail toward an Iranian port, in this still from a video released by US Central Command on April 19.

Oil and natural gas prices rose after the US Navy seized an Iranian ship during a chaotic weekend, Bloomberg writes.

Brent crude traded near $95 a barrel, recouping roughly half of its slump on Friday, when a reopening of the key waterway was announced, while European gas was up about 3%. Tehran closed the chokepoint again on Saturday, after it said a US blockade of Iran-linked ships violated a ceasefire agreement that ends Tuesday.

“Markets are stll betting on a timely resolution, but each day raises shortage risk,” said Bjarne Schieldrop, chief commodities analyst at SEB AB in Oslo. “Physical oil flows remain constrained by disrupted flows, longer voyage times and elevated freight and insurance costs.”

The standoff over Hormuz — through which about a fifth of the world’s oil and liquefied natural gas flowed before the US-Israeli war on Iran began at the end of February — threatens to deepen the global energy crisis and is just one of the unresolved issues, which also include Iran’s nuclear capabilities and Israel’s ongoing invasion of Lebanon.

The conflict has triggered an unprecedented supply shock, intensifying inflationary pressures and weighing on worldwide economic growth. The cumulative global impact of the war will begin to emerge this week, with business surveys from multiple countries potentially flagging risks of stagflation.

“The market’s still carrying a risk premium into the deadline, but just not fully committing to it,” said Haris Khurshid, chief investment officer at Karobaar Capital LP in Chicago. “If things just continue as they are, you probably see a gradual push higher to around $105–$115, but with a lot of back and forth on headlines.”

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