GM. This is Milk Road Macro, the newsletter that’s better at reading the macro tea leaves than your group chat is at explaining why oil just ripped again.
Here’s what we’ve got for you today:
- ✍️ Everything you need to know about the latest with the Iran war and oil prices.
- 🎙️ The Milk Road Macro Show: The $1 Trillion Stablecoin Shift That Could Break Global Banks w/ Geoffrey Kendrick.
- 🍪 How will the Fed react to rising inflation from an energy shock?
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Prices as of 10:00 a.m. ET.
EVERYTHING YOU NEED TO KNOW ABOUT THE LATEST WITH THE IRAN WAR AND OIL PRICES
The Iran war continues to rage on.
And the war continues to have a big impact on asset markets across the world.
On Monday, hopes were raised after President Trump made a promising announcement…
But a wave of contradicting headlines followed.
And it’s not entirely clear what is going on…
So, what’s the latest?
How high could oil rise?
And what are the economic effects?
Let’s take a look…
What’s the latest?
We saw a whirlwind of headlines on Monday - and if I’m being honest, I still have no idea what’s happening.
First, President Trump backed down from his previous threat to destroy Iran’s power infrastructure.
He claimed that “productive conversations” were underway with Iran and outlined that “a deal” may be close.
But then, less than an hour later, Iranian officials said there had been no talks.
This led to contradicting headlines throughout the day.
Axios reported that Special Envoy to the Middle East Steve Witkoff was negotiating with Iranian Parliament Speaker Mohammad-Bagher Ghalibaf.
However, Ghalibaf said on X that no negotiations had taken place.
Iranian state TV said the U.S. had sought talks through intermediaries, but Tehran had not responded.
So, where does all of this leave us?
I have no idea.
Nobody does.
If I had to take a wild guess, I would say there most likely are ongoing talks, despite the lack of official Iranian acknowledgment.
But are U.S. officials even speaking with someone “in control” in Iran?
That’s the big question. Who is actually in charge?
As the U.S. and Israel continue to take out top leaders in Iran, it’s not clear who is in control of the Iranian regime.
It also can’t be ruled out that U.S. officials are being misled here.
Nevertheless, the general theme on Monday was the prospect of a potential “cautious de-escalation.”
This sparked a rally in risk assets and a drop in the price of crude oil.
The S&P 500 is still heavily inversely correlated to the oil price:
- Oil up = S&P 500 down.
- Oil down = S&P 500 up.
However, the growing optimism on Monday was dented by events overnight - missiles and drones are still flying around all over the place.
Iran launched overnight attacks on several Israeli cities, power lines in Kuwait were damaged after an Iranian attack, and Saudi Arabia intercepted a drone.
U.S./Israeli attacks on Iran also continued, with an Iranian gas pressure regulation tank damaged.
Separately, Saudi Arabia and the UAE took steps towards decisively joining the war, according to the Wall Street Journal, potentially signaling an escalation of the fighting.
The clock is ticking for oil
While all the talking continues on both sides of the conflict - the Strait of Hormuz is still effectively closed.
And this is the single most important factor for markets.
A huge portion of the world’s oil supply is still choked off in the region, with the total shortfall of oil growing larger and larger every day.
And this will likely put more and more upward pressure on the price of crude oil with every day that passes.
Marko Papic, chief strategist at BCA Research, said:
“If this doesn’t get resolved over the next seven to 10 days, we’re looking at a pandemic-style shutdown of the global economy. Monday’s announcement suggested Trump is aware the real economy could fall off the cliff.”
Latest figures suggest that the total daily amount of oil sidelined from the global market is currently around 16M barrels (roughly 16% of daily global demand).
However, this daily shortfall could come down slightly, due to:
- Saudi Arabia diverting more oil to the Red Sea through pipelines (about 1.5M barrels per day).
- Major Western nations deploying releases from Strategic Petroleum Reserves (about 1.5M barrels per day).
- South East Asian countries drawing on commercial inventories (1M barrels per day).
- China releasing strategic reserves (1M barrels per day).
- Iranian and Russian “oil on water” supplies being gobbled up after Western sanctions were lifted (1M barrels per day).
But even with all of these temporary policy measures, the daily shortfall is still roughly 10M barrels (10% of global demand - which is still the biggest energy supply shock in history).
JP Morgan's head of commodity strategy Natasha Kaneva, wrote:
“Policy can only cushion the shock, not eliminate it. The only remaining adjustment mechanism is higher prices and the demand destruction they trigger.”
There’s no other way to say it - the Strait of Hormuz needs to be reopened, or the oil price will likely continue to rise…
…until it rises high enough to cause demand destruction - as the global economy starts to stumble and less oil is required as economic growth deteriorates.
So there are two cures here: it’s either the Strait reopens, or the global economy rolls over.
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EVERYTHING YOU NEED TO KNOW ABOUT THE LATEST WITH THE IRAN WAR AND OIL PRICES (P2)
The economic effects are building
As oil prices remain elevated, inflation expectations remain elevated.
One-year inflation swaps (U.S.) have risen to 3.2%.
This means the market expects headline U.S. inflation to be 3.2% on average over the next 12 months.
While energy supply shocks are inflationary, arguably the bigger factor for risk asset markets is what surging prices might mean for economic growth.
According to Augur Infinity’s real-time U.S. growth nowcast, there’s already been a sizable hit to growth in America.
This measure has dropped from 3.5% before the war to 2.2% currently.
Goldman Sachs commodity strategists now assume that the Strait of Hormuz will remain closed until mid-April (even with the chatter on Monday).
The strategists see crude oil peaking at between $115 and $160 in April.
As a result of this, Goldman strategists have lowered their growth expectations for the U.S. in 2026.
And raised their forecast for the unemployment rate.
The Goldman strategists added:
“Recession is not our base case, but we have nudged our 12-month forward probability up to 30%.”
Wrapping up
It’s anybody’s guess what happens next.
We’re stuck in the “fog of war” - and it’s likely all sides of the conflict are lying through their teeth.
But I’m concentrated on one thing - and one thing only: the Strait of Hormuz.
This is the single most important factor for markets and energy prices.
And I think the Strait issue should be separated from the overall war.
It’s possible the war could continue, but the Strait could be reopened.
And it’s possible that the war “ends”, but the Strait remains closed.
Right now - the Strait is still effectively closed (not good).
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How will the Fed react to rising inflation from an energy shock? History suggests the central bank should “look through” a temporary spike in energy prices, but it all depends on how long the shock lasts.
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