For those of you who would prefer to listen:
Thursday night brought news that Israel attacked Iran. The price of Oil spiked 13% overnight. Stock futures sank. Risks of an all-out war between these two adversaries are as high as they’ve ever been. There’s also risk that it drags the entire region into a major conflict. That risk continues into the weekend.
Switching gears quickly on Friday morning, I sat on a number of strategy sessions in pursuit of understanding what exactly happened and where it might lead. Fortunately, we have excellent resources for such things.
The Israeli attack targeted Iranian nuclear sites including its main uranium enrichment facility in Natanz. The missiles killed 6 nuclear scientists and 2 high-level military leaders; The Chief of Staff of the Iranian armed forces, and theCommander of the Islamic Revolutionary Guard Corps. The attack also hit Iran’s ballistic missile program. This was a critical blow to the Iranian leadership. Needless to say, this is a highly serious situation.
The question now is how long the escalation lasts and what will be Iran’s response. We got a preview Friday. Israeli Prime Minister Netanyahu said the strikes will continue until Iran’s nuclear threats are eliminated. That’s a very hard line. Israeli officials said it could take weeks. Tehran immediately responded with a series of drone strikes which were largely intercepted before causing major damage. Later in the day, it launched a series of missiles towards Tel Aviv. Those missiles were also mostly intercepted. It was also reported that the United States was involved in Israel’s defense. That should come as no surprise.
None of this is new. Israel has stated, for years, its ultimate goal is eliminating Iran’s ability to produce nuclear weapons. Diplomacy does not appear to be a strategy that Netanyahu is interested in. Importantly, some of these nuclear facilities in Iran are believed to be a half-mile below the Earth’s surface. Israel doesn’t have the ability to reach them by air. That would require American bunker buster missiles. There’s no indication the United States is interested in aiding that; At least not now.
But this time is considered different. That, from Derek Chollet, the Former Chief of Staff to the Secretary of Defense under the Biden Administration. He said this is not a one-off strike. This is a war. Israel has been very successful in taking out senior Iranian leaders and its military capabilities. It’s believed that Iran was close to getting nuclear weapons and Israel was not willing to let that happen. Chollet said this could be the biggest event in the Middle East in 50 years.
According to one of our sources:
“Iran has to respond forcefully, if only to save face with a domestic audience, which is important for regime stability, but also to have leverage if there is any return to negotiations further down the road. However, its ability to reach Israel and effect significant damage is fairly limited.”
There is one thing that Iran could do to retaliate which would have a profound impact on the Market: Shut down the Straits of Hormuz. It’s a major choke point in the Persian Gulf. That’s the strip of water that sees over 20% of daily global crude pass through. That’s where Iran has the most leverage. That could send the price of Oil back over $100 again. Today it’s at $73. It was $60 a month ago. The Oil Market is still very well supplied. That, at a time when demand has shrunk. The price increase is the war premium.
Iran is much weaker today than in previous years. They’ve suffered from an extended period of sanctions on top of the destruction of its proxy allies in the name of Hezbollah, Houthis and Hamas. Tehran also lost a key ally in Assad, when his regime fell in Syria. The Supreme Leader is losing support, despite his lifetime appointment. It’s a tough spot in Tehran. Iran doesn’t have a lot of friends.
China is the biggest buyer of Iranian Oil. It’s believed to buy as much as 90% of Iran’s exports. China would be heavily impacted by a shutdown. Our sources indicate Beijing has made it clear to Tehran that a major supply outage would not be welcomed. That should keep the Straits of Hormuz open, short of an act of desperation and major crisis.
Remember, Israel and Iran have been in combat for a while. Just back in October, Israel launched a major air assault on Iran that knocked out their air defense capabilities. Those are not easy to repair nor replenish. Iran has been very vulnerable. This fact has contributed mightily to Tehran’s commitment to speed up the ability to enrich uranium and produce nuclear weapons.
Saudi Arabia, Qatar and the United Arab Emirates were all quick to condemn Israel’s attack and call for a return to diplomacy. These are nations that have been hyper-focused on modernizing and growing their economies beyond dependence on Oil. President Trump and leaders of Corporate America were recently in the region cutting deals and developing partnerships. Needless to say, Iran is not part of those deals.
These Gulf states have been recipients of previous Iranian military attacks given their increased closeness to the US. Iran attacked Saudi Oil facilities in 2020, briefly wiping out half of the kingdom’s production. Abu Dhabi suffered civilian casualties in strikes launched 3 years ago. Both countries have since restored diplomatic relations with Iran. But it’s safe to say that trust among them is not strong.
U.S. Oil production is 13 Million barrels per day. That is just off record levels. It’s the top producer in the world. American producers have been cutting production in 2025 as the price of Oil fell. They are unlikely to increase production now, more likely opting to hedge their current production. I’m told trading desks were super active Friday putting on hedges. And remember, America’s strategic reserves were tapped after Russia invaded Ukraine in 2022 taking it down to half-capacity, the level it remains today. Don’t expect more supply to come from America.
The Saudis have the ability to increase supply and replace any lost barrels. They have an estimated 2 Million barrels of spare capacity, though it wouldn’t be an immediate thing to get them in circulation. The UAE has another 1 Million barrels or so. Kuwait and Iraq combine for another 1 Million in potential supply. So there is supply. But the issue is clear; All of the spare capacity sits in the Middle East which is the center of the turmoil. That’s why the price of Oil is higher.
The United States and Iran have been holding meetings on nuclear policy for weeks. The sixth round of talks were scheduled for Sunday in Jordan. Iran indicated it won’t attend. The Trump administration is increasing pressure on the need for a deal or consequences will be much worse for Tehran. A lot can happen over the weekend. Back-channel conversations are constant. But right now, there’s not much hope for diplomacy.
More from our Middle East source:
“Diplomacy is dead for the foreseeable future. It is very unlikely that the Iranian government will return to the negotiating table without at least having attempted a retaliatory strike first, for the purposes of saving face and gathering leverage. This will require some time, particularly as these Israeli strikes are ongoing, and so it is very unlikely, despite President Trump’s call for Iran to come back to diplomacy, that the diplomatic off-ramp will be Iran’s preferred path forward for weeks to come.”
World leaders will gather for the G7 summit in Canada next week. The topic of trade was expected to dominate discussions. The threat of expanded war in the Middle East will certainly take center stage now. Concerns about Russia and Ukraine also remain. There’s so much going on…
Something significant and impressive, the Market has taken these developments very much in stride. Stocks sold off in an orderly fashion Friday. There wasn’t widespread panic. Besides, after the massive move higher from the April lows, the Dow and S&P were due for a breather with some back-and-filling. It’s happening.
It might surprise you that the S&P was basically flat on the week, closing just under that 6K level. That’s where it was a week ago. Energy stocks, no surprise, were amongst the few that went into the weekend in the green. Energy has been sleepy strong of late. Bonds rallied initially, but sold off later. That could be inflationary pressures from higher Oil keeping the Fed on further hold to cut rates. Importantly, yields are nowhere near the lows on the year.
Crude Oil initially spiked to $75, but gave up half of its early gains when it was clear no energy facilities were impacted. Keep in mind, the price of Oil had already been running in anticipation of a geopolitical event. This military activity has been well telegraphed.
There’s also this: The U.S. Dollar has remained weak, something highly unusual around geopolitical events. It’s at levels not seen since 2022. The Dollar has lost some of its shine as the world’s reserve currency. That’s mostly due to policies out of Washington. Gold continues its record run as the precious metal has proven its value all year for money seeking safety in this turbulent environment.
The Market has a long track record of ignoring geopolitical risks and events. Despite these issues, it’s a mere 3% off its all-time highs. There are so many cross-currents beneath the surface. AI is the prize in 21st century. That’s been the clear driver for the Stock Market. Growth and innovation have led. Oil was the prize in the 20th century. It’s clear it still matters. The world still runs on crude.
Thanks for reading. We’re all over it.
Consider filling up your tanks before the rise in Crude hits the pumps from coast-to-coast. They always rise faster than they fall.
Have a nice weekend. We’ll be back, dark and early on Monday. Happy Father’s Day to all you fellow dads out there.
Mike
