It’s going to be another messy week, innit? Hopes for peace talks did not last long as Iran refused any concessions with the US continuing to maintain its military presence in the region. Tehran was not happy with the naval blockade still put in place, thus deciding to “close” the Strait of Hormuz again.
That is the most important development as we get back from the weekend. Iran also delivered a safety warning to any vessels wanting to pass, that especially after the US seized one of Iran’s commercial vessels. On Sunday itself, ship tracking data showed no tankers passing through the strait with many vessels even avoiding entry.
So, what’s next from here?
Well, markets are indubitably responding with a more risk-off mood. However, it’s not to say we are seeing a total reset in market sentiment back to where we were two weeks ago. That even as the reality of the situation feels that way.
US president Trump continues to feed hope in saying that he still believes a deal can be done and that US representatives will be headed to Pakistan to negotiate one. So, that is still arguably allowing markets to retain some form of optimism – even if misguided.
For now, oil prices have opened with a gap higher and are holding gains for the most part. The “front-month” June contract for WTI crude sees prices up by nearly 6% to $87.50 currently. As a reminder, the May contract will lapse today and there might be a bit of a reset come tomorrow.
As for Brent crude, that is also seen up nearly 6% to $95.40 on the day now. Physical prices continue to trade at a marked premium between $40 to $50, so that remains a big issue.
Even if the futures price is not showing it to be that big of a deal, physical prices are still at very inflated levels. And the longer the Strait of Hormuz remains closed, oil and gas supply will continue to tighten further. As such, these prices will continue to stick and that is what will really impact every day consumers and businesses.
Even if markets might be a bit more sanguine about it, the reaction belies the chokehold that the global economy is facing amid a continuation in the US-Iran conflict status quo.
At this stage, Iran’s actions on the Strait of Hormuz are what matters the most. The political noise and victory lap from either side matters little to what is actually happening in the waterway.
S&P 500 futures are only down 0.6% so far today. That is barely even a dent to the near 12% gains that the index has posted in the rebound from the past three weeks, having culminated in a record close at the end of last week.
The fear now is that markets are continuing to underestimate the impact and extent of the economic risks tied with a further continuation to the current geopolitical situation.
Asia is definitely taking the biggest hit but once storage levels in Europe are also slowly being depleted, the situation will hit harder in the region
