My March 30 column on why the Iran war wouldn’t hammer stocks or global economies for long triggered scepticism. War fear is understandable. However, this sentiment really shows the “Wall of Worry” bull markets proverbially climb remains high. Let us explore.
Stocks rebounded after the March plunge. But shaky peace talks and the US blockade raise the risk it proves a false dawn.
My prior war column, published the day of the market low by lucky coincidence, argued stocks would rise before peace was certain. Stocks would see emerging realities were better than feared and look past the war. They knew talks were shaky. Everyone did. The MSCI All-Country World Index (ACWI) rallied 17.1 per cent back to record highs anyway.
The US blockade changes little. Iran had already stopped all “unfriendly” traffic. So what is America blocking? Iran exported just 1.7 million barrels per day prewar, almost all to China, which has huge stockpiles. America’s blockade has minimal impact.
Hormuz workarounds keep mushrooming. Saudi East-West pipeline exports are now at capacity, running over 5 million bpd, up from 800,000 prewar. UAE exports via the Fujairah Port boomed, too. Now, the UAE's decision to exit Opec plus expansion of the pipeline to Fujairah will boost output more. Iraq and Turkey talk of restarting the Kirkuk-Ceyhan pipeline. Lorry caravans transport non-oil goods to Red Sea and Mediterranean hubs.
Non-Gulf energy supply growth is not static, either. April US crude exports hit a record high. Venezuela pumps more now. Countries reliant on Qatari gas – trapped behind Hormuz presently – buy more from America and Australia. Canada is positioning itself as an energy export safe hand in future years. Japan, Korea and other Asian nations are refiring coal power plants. Shortages will prove short-lived.
What about jet fuel?
Dubai’s status as an air travel hub makes shortages scary. But these claims assume the Strait will not reopen soon – and ignore new supply sources or production increases. Such claims already look unlikely. Spiking jet fuel prices boosted refiners’ margins, spurring more production globally. Prices are already far below their April peak. Ticket surcharges may linger. But fears of widespread flight cancellations and chaos are falsely overblown.
Tehran threatens tolls for safe passage. Will that not drive oil prices up more?
Some see Iran charging $1 per barrel for safe passage of the strait – roughly $2 million per oil tanker – and worry it will escalate price spikes. But marginal Gulf oil production costs average about $20 per barrel. Another dollar will not bite much. Already, some ships are slipping through the strait toll-free.
If Iran manages to implement a pay-for-passage plan, driving prices up, global output will rise in response. This is Economics 101 – supply and demand respond to price signals. More supply would bring prices back down.
Longer term, the total workarounds mean Iran’s oil influence will wane. The world has learned not to rely on smooth sailing through the Strait.
But oil is already driving inflation far higher.
Yes, eurozone April inflation grew to 3.0 per cent year-on-year and America’s to 3.8 per cent. But it will reverse quickly. Lasting, hot inflation needs a booming money supply, like post-Covid. That is not now. Eurozone M3 money supply grew 3.2 per cent y/y in March. US M4 is up 5.8 per cent, far off 2020s 30.4 per cent!
Without that, higher oil prices simply drive substitution. People will spend less on luxuries like fancy coffee or dining out. The make-up of GDP and inflation will change, but not the totals.
What about higher petroleum prices pushing up plastic and fertiliser feedstocks used in many goods?
That is not happening. Excluding energy, US prices increased 2.8 per cent year-on-year in April and 2.6 per cent in March, barely budging from prewar rates. In the eurozone, they rose 2.2 per cent year-on-year in April, down from March and February.
Still, investing at such an uncertain time seems unwise.
Comfort is costly in stocks. Consider 2022, for instance. When the ACWI bottomed that October, the Ukraine war raged. Global inflation was spiking. America’s Federal Reserve and the European Central Bank were hiking short-term interest rates. Gloomy recession fears reigned. But stocks foresaw better times far before people did. The same happened in late March 2020, as markets looked past pandemic lockdowns. Rebounds always feel rickety early on.
Yes, but what if everything changes tomorrow?
It may! But it is vital to look further out. Stocks will – pre-pricing news faster than almost anyone can fathom.
Prevalent scepticism helps them do so, facilitating positive surprise and fuelling more bull market. False fears always do.
