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Everything about the war – oil pricing, the Strait of Hormuz’s closure – it all fans fears wildly. Especially in the Gulf, which has been so heavily attacked. But proximity makes capital markets' perspective crucial. History clearly shows regional wars do not roil energy prices, the global economy or stock markets for long. Expect no different this time.
War’s human cost is always horrid. I empathise with everyone affected. But, crucially, markets do not. They are cold-hearted and uncaring of non-economic suffering. Their steely response to previous energy-centric regional conflicts follows a simple pattern ...
Step one, volatility and rising oil prices arrive via pre-conflict mounting tensions as sabre-rattling raises fears. That was January and February, as both Brent and Dubai crude prices jumped from below $60 a barrel to more than $70.
Step two: Initial fighting exacerbates this sharply, as markets price in worst-case scenarios. The energy price surges in March and recent stock market volatility were exactly that.
The good news: step three usually arrives earlier than most expect – stocks fathom the conflict’s limited, temporary economic footprint and rally on the realisation that global growth will persist – rising long before fighting stops. Expect that soon. Stocks' relatively efficiently pre-price economic realities approximately three to 30 months ahead. Expect that.
Past examples abound. The S&P 500 jumped 12.5 per cent during the Gulf War (August 1990-Febraury 1991) and 31.9 per cent in the 12 months after its outbreak. “Forever wars” in Afghanistan and Iraq proved even long, multifront fighting does not prevent bull markets. The run-up to America’s 2003 Iraq invasion did drive a short, sharp correction, but world and US stocks soared 33.1 per cent and 28.7 per cent, respectively, overall that year.
Yes, Russia’s full invasion of Ukraine happened early in a bear market and involved energy. But coincidence isn’t causation. Myriad other factors collided on investors in the rare, sentiment-induced yet recession-less 2022 bear market – inflation, supply chain chaos, US Federal Reserve hikes and more, amid frothy sentiment and elevated stock supply from 2021. Besides, stocks bottomed before year-end while fighting, sadly, continues in Ukraine today.
Oil prices reveal a similar, shocking trend around wars. In the nine major oil-tied regional conflicts since 1980, oil prices in US dollars were on average higher a month after conflict started. But after six and 12 months, oil was 4 per cent to 5 per cent lower than pre-war levels.
Expect something similar this time, with prices reversing not only the surges during the war but erasing the pre-war run-up, too.
Bears argue otherwise, saying Iran’s Hormuz blockade makes this event different. Fundamentals disagree. First, Iran accounted for just 3 per cent of global oil output pre-war. Analysts previously estimated a 3 per cent global oversupply for this year, offsetting that loss. Shipping is the greater concern, with headlines noting 20 per cent of annual global oil flows through the narrow Hormuz chokepoint. They rarely mention, however, that about a third of that is entering the strait for processing, not exiting. It goes elsewhere now.
Pipeline workarounds for almost a third of Hormuz-affected oil already exist and are being tapped. Saudi Arabia’s East-West Pipeline has helped the Saudi port of Yanbu more than quadruple exports since the war began, bypassing the Strait of Hormuz. Drone attacks have only periodically hindered the UAE’s Fujairah pipeline, also providing an effective Hormuz alternative.
Crucially, this is not the 1970s. Then, the world was far more reliant on Middle East oil. America was a weakling producer and reviled by much of the Middle East. Now it is the world’s top producer and has working relationships with most of the region and great ones with the Emirates and Saudi Arabia. Energy efficiency has increased exponentially, too. In the 1970s, it took almost a barrel of oil to generate $1,000 in inflation-adjusted US gross domestic product. Now it takes a quarter of a barrel. Markets fathom this even if many do not.
If I am wrong, high oil prices still don’t doom bull markets. Oil was over $75 a barrel for the back half of 2023, peaking at $98. Global GDP was fine. US stocks rose 26 per cent. In the early 2010s, economies and stocks grew for years with $100 oil. Plus, a decade and a half of global and dollar inflation makes today’s $100 oil more akin to $65 back then.
For stocks, America’s politics matter on this. Several more months of fighting won’t hurt US President Donald Trump. But if the war is unresolved by August? His Republicans will get impaled in November’s legislative midterm elections They will probably lose marginally anyway, as my 2026 forecast suggests. But an enduring war would create a political massacre – strong motivation for Mr Trump to end this saga swiftly.
Stocks will soon consider this war’s economic impacts with cool detachedness. Investors should now.
