Energy Markets are on the Verge of a Disaster!

If you look at the stock market today, you might naturally conclude that the global energy crisis has been permanently resolved. The S&P 500 recently hit another record high, climbing past where it was before the fighting began in late February. Equity traders seem to have decided that a war in the Middle East, one that has closed the world's most critical energy choke point, is simply a great opportunity to buy the dip.

But if you talk to the people who actually move physical barrels of oil, the mood is considerably darker. Futures markets are pricing in a swift diplomatic resolution while physical commodity traders are staring at a completely different reality. There's a massive gap between the optimistic news flow that drives stock prices and the actual cost of a physical barrel of oil sitting on a ship in Northwest Europe.

For weeks, we've seen a bizarre cycle play out. A ceasefire or diplomatic breakthrough is announced. The stock market spikes and the price of crude plunges by 10%.

Then almost immediately, the Iranians announce that they've not agreed to anything and prices reverse. Just this week, despite the announcement of a 3-week ceasefire extension between Israel and Lebanon, Iranian forces boarded and seized two MSC container ships. President Trump responded by ordering the US Navy to shoot and kill any boat caught laying mines in the water.

This is not what a functioning trade route looks like. Investors seem to be suffering from a bad case of muscle memory. They're sitting at comfortable desks in New York and London, assuming that the administration will eventually experience what investors have been calling a taco moment, where taco stands for Trump always chickens out.

They expect the president to look at the upcoming midterm elections, look at the rising price of gasoline, and simply walk away from the conflict, much like he did when he retreated on his liberation day tariffs last year. The fatal flaw in this assumption is that a trade war is fought with administrative inc. You can cancel a tariff with a weekend post on troop social.

A shooting war in the straight of Hormuz is fought with drones, naval barricades, and anti-ship missiles. You cannot unilaterally back down from a conflict where the other side has their own agenda. The Iranian regime has survived the initial strikes and discovered that holding the global economy hostage is an incredibly powerful piece of leverage.

And unlike a nuclear weapon, it's one that they can actually use. As I've said before, it takes two to taco. And right now, the other side of the table is busy seizing container ships.

For the commercial ships currently trapped in the Persian Gulf, the situation has devolved into something resembling a high stakes maritime prison break. Captains are turning off their tracking equipment and sneaking through the water in the dead of night just to get their crews out safely. About 45 ships have entered or exited the strait since a temporary ceasefire was first agreed on April 8th.

Yesterday, over a 24-hour period, only five made it through. At least 22 other ships have been attacked and several others seized by the Iranian Revolutionary Guard since the conflict began. The situation is now being described as a dual blockade.

Iran has restricted passage to hostile vessels from unfriendly countries, while the US Navy began its own counter blockade on April 13th. specifically targeting ships bound for or departing from Iranian ports. The reality of trying to navigate the straight of Hormuz right now sounds less like global logistics and more like a heist movie.

Just this past weekend, a Greek owned tanker called the ACT carrying 300,000 barrels of diesel managed to make a run for it in the dark. It lined up at the head of a snake of ships and slipped out just hours before the Islamic Revolutionary Guard sent gunboats back into the channel. Before we dig into which ships are getting through, let me tell you about this week's video sponsor, Incogn.

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Ships that are being actively targeted, like those tied to the MSC group, are attempting to sneak through with their GPS transponders completely turned off. Some are hiding behind Omani flags. Others are navigating demands from the Iranian regime to pay safe passage tolls in cryptocurrency, which major trading houses vehemently deny paying, as doing so would breach US sanctions.

The resulting backlog has created what one executive described as a car park of 3 to 400 ships desperately waiting to get out. It's not just oil tankers that were trapped. Six cruise ships were stuck in the Gulf, but managed to make it out with skeleton crews and no passengers on board in late February.

One of these was owned by MSC Group, which is business partnerships with Israel. What's perhaps most striking about the whole situation is the complete abandonment of these merchant vessels by Western governments. Larry Johnson, the global head of freight at Mercuria, expressed his frustration this week, saying that politicians are simply burying their heads in the sand.

Stateowned vessels might have access to naval escorts or back channel communications with the Iranian regime, but pure merchant traders are entirely on their own. The US Navy is barricading the coastline and has turned around dozens of ships. Iran is firing on the ones that try to squeeze through.

There's no concerted effort to formalize a safe transit mechanism. Instead, the people tasked with moving a quarter of the world's seaborn oil are essentially being told to turn off their headlights and hope for the best. While investors might assume that this blockade is just a temporary glitch in the supply chain, the physical reality is that the world has now run out of its safety cushion.

In the early weeks of the conflict, the market was insulated by the fact that a near record amount of oil was already at sea when the war started. But by April 20th, the last few tankers that managed to cross Hormuz before the fighting began finally reached their destinations in places like Malaysia and California. That seaborn buffer is now completely exhausted.

Physical commodity traders are warning that a lot of long-term damage has already been done. Sad Raheem of Traffic Eura told the economist earlier this week that a cumulative loss of 1 and a half billion barrels of Gulf crude, roughly 5% of annual global output, is almost unavoidable at this point. Traders are noting that even if a ceasefire holds today, the market might not return to equilibrium until 2030 due to this permanent loss of supply.

Normally, an American president might expect the domestic oil industry to simply drill the country out of an energy shock like this. After all, the US is now energy self-sufficient. The administration has strongly urged oil executives to increase production to bring gasoline prices down, but US shale bosses are actively resisting those calls.

According to a recent Dallas Fed survey, energy executives are refusing to significantly increase production, pointing to the absolute chaos of the current market. While this may not make the president happy, it's a perfectly rational capital allocation decision made by executives who've been burned by over drilling before. The extreme volatility between physical prices and futures prices sends conflicting signals to operators.

They can't responsibly plan long-term capital budgets or rig deployments when the price of their product swings wildly based on presidential tweets. Most companies are taking a do nothing approach to their 2026 budgets. They know perfectly well that if they spend billions to overproduce now and Trump secures a sudden peace deal tomorrow, they'll be left holding the bag in a crashed market.

If you want to understand how a geopolitical energy shock actually trickles down to the real economy, you'll have to look beyond the headline price of crude oil and examine the specific refined products that keep the world moving. Take jet fuel. Europe does not produce enough of it to meet its own demand.

According to Politico, its refining capacity can cover at most 70% of what airlines need. Any prolonged disruption to tanker traffic through the strait will leave carriers scrambling for supply. Europe is currently sitting on about 50 days of jet fuel reserves, which is their typical operating level.

But according to modeling by the data firm Kepler in association with the economist, those stocks are going to fall precipitously if flows through hormuse don't normalize by June. The United States could theoretically help by exporting refined products. But if the administration decides to prioritize domestic prices and bans refined fuel exports, Europe's aviation sector will be staring at a brick wall.

Then there are the esoteric commodities that most people don't think about until they run out. Qatar is not just a dominant player in liqufied natural gas. It's also one of the world's largest producers of helium accounting for roughly a third of global supply.

Helium is a byproduct of natural gas extraction. And you can't safely ship it on a plane. It has to move by sea.

When the straight of Hormuse is barricaded by gunboats, the global supply of helium is effectively choked off. This isn't just about party balloons. Helium has the lowest boiling point of any element along with an extremely high thermal conductivity, which makes it irreplaceable as a coolant for sensitive equipment.

It's used to cool the superconducting magnets in MRI machines, as a carrier gas in the chemical vapor deposition processes used to manufacture semiconductor chips, and as a purge gas in clean rooms. There is no synthetic substitute for helium. If you're running a chip fabrication plant or a hospital radiology department, you cannot swap it out for something else.

The logistical nightmare of this blockade doesn't stay confined to the Middle East either. The global shipping industry operates as a closed loop because ships can no longer safely pass through the region. They're being forced to take a massive detour around the Cape of Good Hope.

This significantly extends journey times, which effectively removes a huge chunk of shipping capacity from the global market. Congestion at the Panama Canal has intensified too as buyers have turned to purchasing crude oil from the Gulf of Mexico to replace their Middle Eastern supplies. The canal was already dealing with severe transit restrictions due to historic droughts.

Now with oil tankers outbidding bulk carriers for scarce transit slots, the knock-on delays are rippling through supply chains that have nothing to do with energy. According to the FT, ships carrying lower value cargos like grain are being pushed to the back of the queue as oil tanker operators pay millions of dollars to skip to the front. Wait times at the canal have stretched to around 40 days and some grain routes have already seen shipping rates increase by 50 to 60%.

Grain is now moving slower and costing significantly more to transport. Which brings us to perhaps the most alarming knock-on effect of this crisis, the threat to global food security. People tend to think of the energy market and the food market as two separate things, but modern agriculture is essentially a very efficient system for converting hydrocarbons into edible calories.

Natural gas is the primary feed stock for nitrogen-based fertilizers like ammonia. And the straight of Hormuse handles roughly a third of the world's seaborn fertilizer trade. When the straight closes and gas prices spike, agricultural input costs explode.

Before the hostilities broke out in late February and hydra ammonia cost US farmers around $800 a ton. Today it's sitting at $1,050 a ton. But fertilizer is only one part of the equation.

To run a modern farm you need massive amounts of diesel to operate the tractors, the combines and the trucks that transport the harvest. The agricultural sector was already operating on razor thin margins and this dual spike in both fertilizer and diesel costs represents a massive unbudgeted expense. A recent survey by the American Farm Bureau Federation found that around 70% of farmers report being unable to afford all of the fertilizer they need for this crop cycle.

And even if they could afford it, the supply chain is working against them. The chief risk officer of Louis Drfus pointed out this week that there's growing competition for other critical agricultural inputs like sulfur, the fourth major nutrient after nitrogen, phosphorus, and potassium. Because of the crisis, sulfur is being diverted to higher value industrial uses like copper smelting, leaving fertilizer producers waiting at the back of the queue.

Zippy Duval, the president of the American Farm Bureau Federation and the man with the most American sounding name I've ever come across, told the FT that the farm outlook is bleak right now and farm country needs help. Look, it's not necessarily the best quote ever, but I included it just because I wanted to say Zippy Duval. Pablo Escobar, yes, that's his real name, too, the head of LNG at Vital, warned this week that we're living on borrowed time, saying that if this continues, the energy crisis will rapidly become a global food crisis.

But of course, the term global catastrophe means different things to different people. While agricultural traders are worried about crop failures and food security, Bernard Arno, the billionaire head of LVMH, has his own concerns. He warned his shareholders this week that the war could spiral into a global catastrophe with extremely negative economic developments if it isn't resolved quickly.

His definition of catastrophe, however, appears to be that sales of Louis Vuitton and Dior handbags in Middle Eastern shopping malls have fallen by as much as 70% since the war began. One sector is preparing for famine, and the other is lamenting a drop in high-end spirits, clothing, and luxury leather goods. While the US deals with expensive diesel and unsold handbags, Europe is facing a much more structural squeeze.

Right as the Hormuz crisis reached its peak, Russia decided it was the perfect time to turn the screws on Germany. Moscow has announced that it will suspend the flow of Kazak oil through the Soviet era pipeline that supplies the PCK refinery, the facility that provides 90% of the petrol, kerosene, and heating fuel to the German capital. By cutting off this alternative supply line right as seaborn imports are choked off in the Middle East, Russia is ensuring that Europe feels the maximum possible pain from this conflict.

Whenever an energy crisis breaks out in the Middle East, financial commentators inevitably start drawing comparisons to the 1970s. We're immediately bombarded with black and white footage of cars lining up at gas stations and warnings about a return to the stagflation that defined the era of the 1973 Arab oil embargo and the 1978 Iranian oil workers strike. In certain ways, the current situation is a lot worse than what we saw in the 1970s.

As Daniel Jurgen pointed out recently on the OddLots podcast, the absolute volume of the disruption we're seeing today is the largest in history. Global oil production and consumption are roughly twice what they were 50 years ago. However, major economies are structurally much more resilient to oil shocks today than they were back then.

The metric economists use to measure this is called the oil intensity of GDP. It measures how many barrels of oil it takes to produce a single inflationadjusted dollar of economic output. Since the 1970s, the oil intensity of the global economy has declined by more than 70%.

Our factories are more efficient, our cars get better mileage, and our power grids rely much more heavily on other sources of energy than they do on petroleum. But while the physical economy might be less vulnerable, the financial economy is standing on much shakier ground. Paul Krugman noted recently that in 1978, the price toearnings ratio of the S&P 500 was sitting at historic lows.

Today, equity valuations are stretched to nearrecord highs, supported by a highly complex, interconnected private credit market that didn't exist in the 70s. We have an economy that requires less oil, but a financial system with a much lower margin of safety for a prolonged inflation shock. This crisis is also fundamentally rewiring how governments think about energy infrastructure.

For the last two decades, the push towards wind, solar, and electric vehicles has been driven primarily by climate policy. The closure of the straight of Hormuz has rebranded the entire green energy transition into a matter of national security. You can't fix a 20% drop in global hydrocarbon supply with wind turbines in the short term.

But the realization that an entire continent can be held hostage by cheap Iranian drones is rapidly changing capital allocation decisions. In Asia, where countries are heavily dependent on imported seaborn oil, the transition is accelerating. Electric vehicles now make up over 50% of new car sales in China and 40% in Southeast Asia.

While the US tries to drill its way out of the crisis, Asia is looking to nuclear power and electric vehicles as tools for long-term energy sovereignty. All of this structural shifting will take time. In the immediate present, the Western world is dealing with the harsh reality that inflation is back and it's going to be sticky.

The economic fallout from this war has already started showing up in the data. Both the United States and the United Kingdom saw inflation accelerate to 3. 3% in March.

In the UK, the Bank of England is now facing a central banker's worst nightmare. An external energy shock that raises the cost of living while simultaneously killing economic growth. In the US, the political panic is becoming palpable.

President Trump has dispatched his top lieutenants, including Interior Secretary Doug Bergam, to beg oil executives to increase production. Meanwhile, Treasury Secretary Scott Bassand has resorted to threatening retail gas station owners, warning them that the administration is watching to ensure they slash prices at the pump the moment crude oil drops. If that rhetoric sounds familiar, it should.

It's almost a word forword copy of the Biden administration's complaints about the price gouging at the pump back in the summer of 2022. President Biden tweeted at gas stations, "Bring down the price you're charging at the pump to reflect the cost you are paying for the product and do it now. " It turns out that yelling at gas station owners is a bipartisan tradition.

Regardless of who's in the Oval Office, the political response to an energy supply shock is exactly the same. panic, ignore the underlying market dynamics, and threaten the guy who owns your local gas station. The problem is that you can't yell at inflation until it goes away.

The IMF warned earlier this week that short-term inflation expectations in the United States have already moved up and that the economic fallout from this conflict will not evaporate overnight, even if a ceasefire is signed tomorrow. The increased costs of fertilizer, diesel, and rerouted shipping have already been baked into the supply chain. Those costs will inevitably be passed on to the consumer, at the grocery store, and at the hardware store over the coming months.

While politicians focus on the price at the pump, macroeconomic analysts are looking at how this crisis is fundamentally rewiring the flow of global capital. When the price of energy spikes, the balance of global trade shifts. Brad Settzer, an economist at the Council on Foreign Relations, pointed out on the FT Economics podcast last week that you would be wrong to expect an energy shock of this magnitude to wipe out the massive trade surpluses held by countries in Asia.

China's surplus in manufactured goods is so structurally enormous that even paying record prices to import seaborn oil barely makes a dent. While this energy shock is a big deal, it won't magically rebalance the global economy. It simply redirects a portion of the dollars that were accumulating in Beijing towards alternative oil and gas exporters.

Some of that money will go to Saudi Arabia, which has an East West pipeline and can still get some oil out, but most of it will flow to the world's other exporters. Kazakhstan, Tajjikstan, Norway, Russia, and some South American producers. The US and Canada collectively export about 5 million barrels of oil a day.

So what Setser expects to see is a general shrinking of the big Asian and European surpluses with the money flowing instead to certain oil producing economies. A reshuffleling of who holds the world's dollars rather than a fundamental rebalancing. Because the United States is now the world's largest oil producer, a position it's held since 2018, you might assume that this shock would ultimately be a net positive for the American economy.

But the windfall at the wellhead doesn't necessarily reach the kitchen table. American oil and gas exporters are benefiting from higher prices, but the American consumer is absorbing the pain on the other side, paying a geopolitical tax on everything from agricultural products to transportation, leaving them with less money to spend on the rest of their needs. The US trade deficit isn't shrinking, life is just getting more expensive.

This brings us to the ultimate lesson of the crisis. As I mentioned in my video on Europe's financial nuclear option back in January, the financial markets have spent the last 30 years operating under the great illusion, the belief that economic interdependence naturally prevents conflict. We assumed that because an open straight of hormuse was essential for the survival of the global economy, no rational actor would ever try to close it.

But the interdependence that was supposed to be our safety net is framed from both ends. On one side, Iran has discovered that holding the global economy hostage with a fleet of cheap drones is a highly effective negotiating tactic. On the other, the world's major economies have spent the last two years actively reducing their dependence on each other through tariffs, export controls, and onshoring, dismantling the very web of trade relationships that was supposed to make a crisis like this irrational.

When you control a vital geographical choke point, you don't need a trillion dollar military to exert massive geopolitical leverage. And when your adversaries are already pulling apart the system that was supposed to deter you, you have even less reason not to try. For decades, the global supply chain has relied on the unwritten assumption that the United States Navy would act as the ultimate guarantor of free trade, safely escorting merchant vessels from one side of the globe to the other.

That assumption is now obsolete. The Navy is no longer acting as a neutral guardian of open sea lanes. It's an active combatant running its own blockade.

The merchant marine is on its own. We've moved from a world of global cooperation to a highly transactional era where historic alliances are significantly less meaningful. A negotiated diplomatic deescalation might eventually provide a sigh of relief, but it cannot undo the realization that the plumbing of the global economy is incredibly vulnerable in this new transactional era.

The stock market might be buying the peace trade today, assuming that a weekend of strongly worded truth social posts can fix the supply chain, but the physical world moves at its own pace directed by ships, pipes, and turbines rather than market sentiment. If you found this video interesting, you should watch my video on prediction markets next. Since it came out, we saw headlines about a special forces soldier betting on Maduro's removal before the raid was reported and people messing with weather data to win a bet.

Don't forget to check out our sponsor, Incogn using the link in the video description and see you in the next video. Bye.