The main issue that market players are struggling to grasp right now is the relative uncertainty with regards to the duration of the US-Iran conflict. That mainly affects the energy security in the region, especially with regards to the Strait of Hormuz and threats to other oil and gas facilities in Gulf nations. In turn, that plays to the broader market mood such as risk sentiment and inflation fears.
From the early reaction, one can argue that we’re not quite seeing a lot of fear priced in just yet. The baseline seems to be the case that Iran will slowly be incapacitated to the point where they won’t be able to stir up much of a ruckus and normal operations resume eventually. But with each passing day that the status quo remains, markets will continue to be pushed closer to the edge in expecting otherwise.
There is a report from Politico that was out earlier and it is flying a bit under the radar. However, it could be one to suggest that the conflict could well extend beyond “weeks” and instead measure up to “months”. The report notes that:
“US Central Command, meanwhile, is asking the Pentagon to send more military intelligence officers to its headquarters in Tampa, Florida, to support operations against Iran for at least 100 days but likely through September..
It’s the first known call for additional intelligence personnel for the Iran war by the administration, and a sign the Pentagon is already allocating funding for operations that may stretch long beyond President Donald Trump’s timeline for the conflict.”
If we are talking about months here where Iran continues to fight back and we see extended or even on-and-off disruptions to the Strait of Hormuz, that’s not a good timeline to be looking at. And surely, that is one that markets are currently not prepared for even when just looking at oil prices alone currently.
WTI crude oil is up by another 1.5% today to $77.30 now but that owes much to Iran playing down previous reports of a potential de-escalation. We’re now tracking the highest levels since June last year but after that, it’s a clear path towards $80. And as mentioned earlier in the week, if traders are actually considering prices above the $80 mark then it could be a quick rush to see the balance of risks shift towards talk of $100 soon enough.
