G-7 finance ministers are meeting today to discuss releasing reserves now that crude oil prices are over $100 per barrel. When Israel hit some crude oil tanks in Iran, the fear spread that Iran may not immediately come back online after the fighting stops. The Trump Administration was not happy with the IDF strike on crude oil tanks, so hopefully, there will not be more attacks on Iran’s oil infrastructure. China, India, South Korea, Japan, Germany, Italy and Spain are called big importers of crude oil, so their economies are especially sensitive to price shocks.
Clearly, the key to getting crude oil prices to subside is to reopen the Strait of Hormuz after Iran’s missile and drone facilities are destroyed. Also, the perception that since the Ayatollah’s son, Mojtaba Khamenei, was named the new Supreme Leader, means that hardliners in Iran remain in charge, so no surrender is anticipated. However, Mojtaba Khamenei has spent a lot of time in London due to medical issues, so he may not be as hardline as some perceive. So, it will be interesting if Iran wants to continue fighting, since it seems futile.
In the meantime, the chaos in the Middle East is not boosting prices, which have consolidated somewhat. The U.S. dollar remains super strong, and that should help U.S. financial markets be much more resilient. Also, since gold is priced in U.S. dollars, I am expecting gold to reemerge as an oasis for nervous investors.
Bloomberg has been reporting that Ed Yardeni raised the probability of a market meltdown to 35% for the rest of the year, up from 20% previously. Yardeni also slashed the odds of a meltup, namely a rally driven more by investor enthusiasm than underlying fundamentals, to just 5% from 20%. Specifically, Yardeni said, “If the oil shock persists, the Fed’s dual mandate would be stuck between the increasing risk of higher inflation and rising unemployment.” Obviously, I highly respect Ed Yardeni and believe he is stating the obvious. The good news is Ed Yardeni has assigned an 85% chance of a continuation of the Roaring 2020s.