Oil and bond markets continue to show signs of stress as the U.S. war on Iran stretches into fourth week
Michael Nagle/Bloomberg via Getty Images
As the U.S.-Israel war on Iran stretches into its fourth week, the economic damage is quickly accumulating, darkening the global economic picture. Energy-industry CEOs are just one party among many warning that most people still haven't yet grasped the full scale.
On Monday, the national average gas price hit $3.97, up from $2.92 just one month ago — a 36% increase in 30 days. As of Tuesday morning, Brent crude is trading at around $98 a barrel, up a staggering 63% since the year began. This makes it an extra interesting time for the CERAWeek energy conference to kick off in Houston this week. Widely considered the Davos of the energy markets, the conference is put on by S&P Global $SPGI and draws the leading lights of energy markets, typically including the heads of Aramco, Chevron $CVX, ExxonMobil $XOM, all major national oil companies, the IEA, and OPEC, as well as U.S. energy officials.
The fact that the Saudi Aramco CEO and UAE minister both canceled their appearances this year to deal with the war fallout is itself newsworthy, signaling how serious the situation is. When the people who would normally be keynoting the world's biggest energy conference are too busy managing a crisis to attend, that’s a major indicator of disruption in the field.
But that’s also just the tip of the iceberg — or the oil field, said speakers who were able to keep their conference schedules intact.
Speaking at CERAWeek, Mike Wirth, the CEO of $400 billion oil and gas giant Chevron, said everyday people don’t understand the scale of the disruption or the scale of the economic risks. "There are very real physical manifestations of the closure of the Strait of Hormuz that are working their way around the world through the system that I don't think are fully priced in," Wirth said.
Goldman Sachs $GS has called it the largest-ever supply shock to global crude markets. The IEA compared it to the two 1970s oil crises and the 2022 Russia gas shock combined. Meanwhile, President Donald Trump claimed on Monday that a "complete and total resolution of our hostilities" with Iran was imminent — which would be quite a development if true, given that hostilities have already lasted about 40 years before the bombing began. Iran, for its part, denied any talks had taken place.
For those roughly four decades of U.S.-Iran hostility, closing the Strait of Hormuz served as Iran's theoretical trump card — threatened periodically, but never actually played, and generally considered too extreme and economically self-destructive to be a realistic option. Then the U.S. and Israel suddenly began bombing Iranian military infrastructure as well as residential buildings and cultural heritage sites, killing both political leadership and thousands of civilians. Facing this overwhelming firepower, Iran reached for one of its biggest weapons and closed the Strait; it remains closed.
That means a supply shortage amounting to 11 million fewer barrels of oil daily — a gap that the IEA's emergency release of 400 million barrels from global strategic reserves, including 172 million from the U.S.'s strategic reserves, cannot fully offset. Asian countries are already implementing energy conservation mandates, school closures, and work-from-home orders in response to physical supply shortages.
Even after the Strait reopens — and no one knows when that will happen — physical supply chains won't snap back immediately, Wirth warned.
Rising oil and gas prices, caused by the supply shock, are affecting investor expectations across other indicators and markets.
Most of all, it’s causing experts to expect increased inflation, since energy is a crucial input cost in basically every aspect of the cost of living, whether one’s speaking of commuting costs (gas in cars), heating and cooling homes (utility companies affected by rising commodity prices), or the cost of food (petroleum is a key input in fertilizer, and that’s before you look to food’s shipping costs).
This widespread expectation of greater inflation is also limiting options for policymakers.
The Federal Reserve’s primary tool against inflation is keeping rates high, and its mandate is to keep inflation around 2%. If oil is driving inflation higher, cutting rates would pour fuel on that fire by making borrowing cheaper and stimulating more spending and demand. So the Fed is stuck: The economy may be slowing due to the shock, but inflation is rising due to the same shock, and cutting rates to help the economy would make the inflation problem worse.
That's the "stagflation" trap, and the Fed has no good move.
At the same time, these increased expectations of inflation and decreased expectations of Fed rates cuts are also causing global bond values to drop, which likewise contributes to steadily elevated or increased borrowing costs. Global bonds have lost $2.5 trillion in value in March alone — their worst monthly loss in over three years. Analysts are, in turn, projecting 30-year mortgage rates above 7% within days.
Another key indicator? Japan's 10-year government bond yield hit 2.30% overnight — near its highest level since 1999 and above the 2008 financial crisis peak. The Japan numbers matter to American borrowers because Japan is one of the largest holders of U.S. Treasury bonds, and when Japanese yields rise, Japanese investors have less incentive to hold U.S. debt. The selling pressure this creates functions to push U.S. yields higher and mortgage rates along with them.
Rising U.S. mortgage rates, in turn, tend to chill housing-market activity, just as one might expect, contributing to overall economic stress.
Taken together, these factors could create a sustained challenge to the U.S. and global economies. The question now is how deep it will go and how long it will last, not whether it's coming.
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