Markets Brace for 10% Correction Without ‘Defined Off-Ramp’ from US-Iran War

Energy markets intelligence provider Argus estimated Monday that 6.2 million to 6.9 million barrels of daily oil supply is now offline, with Saudi Arabia, the UAE, Bahrain, Iraq and Kuwait all trimming output in response to the near closure of the Strait of Hormuz. The US-Israel conflict with Iran has triggered the biggest oil supply disruption ever, topping the 1956 Suez crisis. Officials will meet today to discuss measures to address the myriad impacts, while one Wall Street bank said investors would be wise to gird for a stock market correction.

Tactical Bears

The US administration sent mixed messages yesterday about how long war with Iran could drag on. President Donald Trump told CBS News that the conflict “is very complete” and that the US was “thinking about taking over” the Strait, the world’s most strategically important energy chokepoint. The S&P 500 gained on Trump’s words, staging the biggest single-day comeback in a year and closing up 0.8%. Meanwhile, an official Pentagon account on social media suggested otherwise, posting: “We have only just begun to fight.”

Looking ahead, officials remain focused on shielding energy markets. Economy and finance ministers in the EU, a net energy importer, are holding a second day of talks in Brussels today. South Korea, another net importer, said it would cap oil prices for the first time in 30 years. And energy ministers from the Group of Seven (that’s Canada, France, Germany, Italy, Japan, the UK and the US) will hold a call today to discuss using strategic oil reserves. The US reportedly prefers releasing 300 million to 400 million barrels from the 1.2 billion in emergency stocks held by International Energy Agency members. With that option on the table, oil prices softened Monday: US crude traded at $88 per barrel and the international benchmark, Brent, at $98, retreating from well above $100. But without a near-term solution, US stocks and growth could still be poised for setbacks:

• “We are now tactically bearish,” was the message JPMorgan sent in a note to clients on Monday. The bank’s analysts said those who bought the dip last week “expecting de-escalation” might not be prepared for a potential 10% correction in the S&P 500. A “relief rally” could eventually follow, they said, but not until the US finds a “defined off-ramp” from the Iran conflict.
• Analysts at investment advisor Vanguard said in a note Monday that a moderate scenario where oil hovers between $90 and $100 a barrel for one to two quarters could trim US GDP growth by 0.1% and add 0.8% to inflation.

Glass Half Full: Patrick De Haan, the head of petroleum analysis at GasBuddy, tweeted it’s “likely true” that the spike in US fuel prices, up 17% at the pump to $3.48 since February 28, will be temporary. Meanwhile, LPL Financial wrote that “the stock market has demonstrated remarkable resilience in the face of major geopolitical shocks in the past.” They found that, following 26 such events over 80 years, the S&P 500 experienced an average pullback of 4.5% before “typically stabilizing in less than a month.”