IEA Blockbuster Oil Release Announcement Fails to Resonate as Oil Prices Bounce Again
Financial markets tighten as a credit shock joins in on the war shock.
Key Takeaways
Oil Shock Increases as Strait Attacks Continue: Oil prices are soaring again despite the unprecedented 400-million-barrel IEA release because Iran has resumed striking ships in the Strait of Hormuz. How and when such a massive volume gets delivered is a legitimate question, not to mention when the Strait of Hormuz will open safely for passage once again (I admit that I am miffed that this was somehow missed in the pre-war planning). Besides the fact that the release of this oil is equivalent to about 20 million barrels per day of lost Gulf production, so the war better end in the next three weeks or else this run-up in crude is likely to become seriously extended.
Military Tanker Escorts Urgently Needed: The U.S. government would be well advised to stop delaying and hasten the move towards allowing military escorts for oil tankers through the Strait, because the world economy cannot withstand a prolonged paralysis of the world’s most critical energy-transport channel. President Trump’s comment yesterday that “when the time comes, the U.S. Navy and its partners will escort tankers through the strait if needed” is not exactly a confidence builder, acknowledging that such an operation would obviously have its challenges.
Credit Stress Builds as “Gating” Continues to Grow: Adding to the anxiety, Morgan Stanley was the latest to cap redemptions from one of its credit funds, along with Cliffwater’s flagship private credit vehicle, as this “gating” cycle gains momentum. So not only do we have a war shock to contend with, but also the possible makings of a credit shock to boot. The effects of a de facto 50+ basis point tightening in financial conditions since late February from the combination of a stronger dollar, wider credit spreads, higher market rates, and a softer stock market are beginning to percolate.
