The catalyst

The oil shock due to the conflict in Iran is becoming more permanent than anticipated, and it’s bringing unintended consequences. 66 days into the conflict and the strait of Hormuz continues to be effectively closed, and we’re just one missile away from a re escalation of the conflict. Brent is up playing with $120/barrel, and there seems to be no clear solution to the glut in the short term. The two charts below are self explanatory: no ships crossing the strait imply higher Brent prices, which lead to higher gas prices at the pump. 50% increase in those 66 days. In one month, the U.S. starts the driving season. It’s also the time where international family vacations happen. Filling the tank is becoming an issue, and low cost flying is low cost no more. Spirit airlines is gone, and every airline that did not have the fuel hedges on, is in trouble. And even if they had the hedges in place, the may be cash rich, but getting the actual kerosene is tricky. Inflation rates are going up globally, and bonds are starting to play with the 5% handle. And yet, equity indices are too close to all time highs. What will be the catalyst that brings back equilibrium? It’s difficult to see high oil, high inflation and all time highs in equities, all at the same time, for a sustained period of time.

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