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In-depth: How bad will the oil crisis get?
Newsbites: Private credit, inflation prints, and mortgage pain.
PensionCraft News: Inflation risks, oil price impacts, and Damien Talks Money.

IN-DEPTH

Wish We Weren't Here

Have you decided where to go on your holiday this year? I know you’ll want to get away from it all. Somewhere quiet. Scenic. Peaceful.

Oh, that looks ideal, doesn’t it? Not a ship in sight! Oh no, wait, that’s the Strait of Hormuz.

Now there’s a few annoying things about this particular strait. One, it’s quite clearly curved. Two, it’s a notorious trade chokepoint. And three, it’s currently closed.

The closure has stripped the market of roughly 20 million barrels a day of crude oil, or about a fifth of the global supply. Plus about 20% of LNG, 30% of fertiliser shipments, and a large chunk of container traffic.

None of these numbers are a surprise. They've appeared in every geopolitical risk briefing written over the past forty years. (Usually in bold type under a section called “Hypothetical worst-case scenario”.)

The result is that Brent closed yesterday above $100 a barrel for the first time since August 2022, in the aftermath of Russia’s invasion of Ukraine. During the 2022 crisis, Brent stayed in the triple-digits for 110 days.

High oil prices are economically crippling, raising the cost of energy, raw materials, and transportation. Oddly, Trump tried to frame the price surge as… good?

Let’s see if Americans agree once gasoline costs more than $4 a gallon, which many consider a breach of their constitutional rights.

And oil prices might well have further to run the longer the strait stays shut.

Other analysts think $200 a barrel is not out of the question. Iran itself seems to be targeting the same number. But before you see dollar signs and take up a side-gig as an oil trader, consider that volatility is at unprecedented levels. Several commodity traders and hedge fund execs have already been shown the door after being caught on the wrong side of whichever way crude decided to move that morning.

It takes two to TACO

“Trump Always Chickens Out.” Or so the theory goes. Tariffs were softened when bond markets became “a little yippy,” and perhaps oil markets would have a similar effect.

Indeed, the start of the week saw a dramatic fall in the oil price as Trump said the war was “very complete, pretty much.” That decline reversed as Trump muddied the waters and markets realised that Iran might not even like Tacos.

Ultimately, gaslighting only works until you run out of fuel.

For Iran’s part, new Supreme Leader Mojtaba Khamenei called for the Strait of Hormuz to “remain closed” in his first public statement.

Over a barrel

While the risk is clearly to the upside, the oil market has weathered significant shocks before. Energy supply often proves more adaptable than bears expect. But it all comes down to how long the disruption lasts.

There are several buffers to draw on. More than a billion barrels of oil are at sea aboard tankers at any given time. Around 3 billion barrels are held in commercial inventories, and governments have 1.2 billion barrels in strategic reserves.

The obvious answer to a supply shortfall would be to boost production elsewhere. The good news is OPEC’s spare capacity is estimated to be 3 to 4 million barrels per day. The bad news is almost all of it sits in just two countries: Saudi Arabia and the UAE. On the wrong side of the Strait of Hormuz.

Still, there are other mitigations. Saudi Arabia is rushing to reroute supplies through a pipeline to the Red Sea with a capacity of 7 million barrels a day—a large slice of its usual exports. The kingdom has booked a flotilla of tankers at extortionate rates of more than $450,000 a day vs pre-war levels of around $100,000.

Meanwhile, the International Energy Agency has agreed the largest release of strategic oil reserves in its history—400 million barrels, dwarfing the 182 million released in two phases in 2022 after Russia's invasion of Ukraine. This is only the fifth time the agency has taken such a step since it was founded in the wake of the Arab oil crises of the 1970s.

However, it's flow that matters as much as volume. The US said its release would take around 120 days to deliver, perhaps at a rate of just 2 million barrels a day. It’s a drip-feed, not a flood.

The UK is also planning to release its strategic oil reserves. Both barrels. (Still, I went for a walk yesterday and can confirm we have a thriving strategic wind reserve.)

Strait to the point

So what stops runaway oil prices? As the saying goes, the cure for high prices is high prices. They incentivise tankers to risk running the strait, stomaching vastly higher insurance premiums and paying hazard wages to crews to contend with missiles, drones, mines, and possibly the kraken.

But the more powerful mechanism is demand destruction. Governments are already telling their citizens to simply… stop using oil.

“What the Danes should please, please, please do is that if there is any energy consumption that you can do without, if it is not strictly necessary to drive the car, then don’t do it.” — Lars Aagaard, Danish energy minister

Vietnam has encouraged businesses to adopt remote working and reduce travel. The Philippines has gone further, implementing a temporary four-day week across its government to conserve fuel.

The EU, on the other hand, is considering capping prices for consumers. Which has famously never backfired.

Ultimately, governments have limited options. Energy shocks spread through supply chains, and lead to inflation if sustained. But it's not just energy that passes through Hormuz.

Fertiliser inputs are stuck behind the strait, which lowers crop yields and raises food prices. Helium is stuck, which impacts chip fabrication. Sulphuric acid from Gulf refineries is used to extract the copper needed for EVs, transformers, and the green energy supply chain. Ethylene, polyethylene, and polypropylene—the building blocks of plastics—are stranded, which hits packaging and manufacturing.

And of course, jet fuel and container fuel are running low, which raises the cost of moving anything anywhere.

Markets are starting to price in the risk of stagflation. The two-year US Treasury yield rose to its highest level since August as the Fed looks less able to cut rates despite a slowing labour market. Yet somehow, the S&P 500 is less than 5% from its all-time high.

Are TACOs about to get much more expensive?

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NEWSBITEs

More cockroaches emerged from private credit's skirting boards this week. As Jamie Dimon once put it: "When you see one cockroach, there's probably more." His own bank duly obliged, marking down software loans held by private credit funds as collateral. BlackRock limited redemptions at its $26bn HPS fund, while Blackstone faced record 7.9% withdrawal requests at its flagship private credit fund. Deutsche Bank, meanwhile, is looking to expand its private credit offerings just as investors call into question the credit quality of the sector. Just Deutsche Bank doing Deutsche Bank things.

US consumer prices held steady at 2.4% in February. Core inflation was unchanged at 2.5%, with rents posting their smallest monthly rise since January 2021. It might be the last clean CPI print for a while. Enjoy it.

The US launched Section 301 trade probes into 16 major trading partners. The investigations target the EU, China, Japan, India and others for "excess industrial capacity," and aim to rebuild the tariff wall after the Supreme Court struck down Trump's reciprocal levies last month. Trade representative Jamieson Greer wants them concluded before the temporary 10% blanket tariff expires in July. If at first you don't succeed, tariff, tariff again.

UK lenders pulled 472 mortgage products in 48 hours. The average two-year fix topped 5%, up from 4.84% last week, with five-year deals reaching 5.09%. Swap rates surged as oil price fears forced markets to reprice rate-cut expectations. It's the biggest product cull since September 2022's mini-Budget chaos. And not a lettuce in sight.