▶ Full Post Text
What happened this 3-day market weekend so far?
First, in line with their strategy of counter-escalations and widening, Iran continued attacks on regional refineries and desalination plants, hitting some in Kuwait. These types of attacks bring us from a short-term supply shock driven by logistics constraints (Hormuz), to a long-term supply shock driven by diminished production.
Second, Iran has rejected a 48-hour ceasefire proposal by the US. "But ub3r, a 48-hour ceasefire is bullish! It shows the US wants a ceasefire". Nope. The US just wants to find their missing aircraft crewmember (one of the two is still missing) to deny Iran a propaganda victory. The US is therefore constrained in their ability to attack areas where the crewmember might be (without the risk of killing the crewmember), and seem to have sought to prevent Iran from gaining any strategic advantage during the S&R operation.
Third, President Trump has said the quiet part out loud...again. This is an oil grab. This isn't about regime change. This isn't about nuclear weapons. The U.S. wants control over Iran's oil, or at the least control over a client government that controls Iran's oil.
Not only that, but Trump seems to be soft launching pushing his (already pushed out) 3 week deadline (which, by the way, would be 3 weeks from his speech, April 22nd). If the 22nd is the most hopeful timeline for a cessation of hostilities, and it will take months to reopen Hormuz and normalize oil flows after that, we are looking at the end of June under the most hopeful scenario, and his language about needing "a little more time" pushes that out further.
Forth, Hegseth is cleaning house. I see this as removing anyone who is an obstacle to his push to put boots on the ground. He doesn't want Generals who challenge his desire to escalate. He wants Generals who are going to support him in his push to escalate.
As I have said, oil is traded on the margins, is inelastic, and a shortage of oil leads to a daisy chain of price increases throughout the entire supply and manufacturing chain, magnifying prices to wholesalers, end users and consumers.
Given all this (and especially on the back of the first point), oil futures are likely to continue to rise, and the S&P is likely to continue to slide as we see an increased likelihood of a medium to long term supply disruption (which can no longer be cushioned by floating reserves or the SPR releases). I also expect to see a shift from headline-driven price action to physical supply shortage price action, where the floor can only be so low based on "good" (see also: less catatrophic) news. In other words, hope will likely give way to macro reality.
Disclosure: I hold mainly cash and OXY April/June call options (plus some LEAPS and long term stocks bought before or early in the conflict). If history (see 1970s oil embargo and 2022 Russia/Ukraine War) is any guide, a 10% drawdown in the S&P was just the beginning.