Oil surges due to war in Iran

Oil prices spiked to their highest levels since 2022 as the expanding U.S. and Israeli war with Iran raised fears of a prolonged disruption to shipping and supply.  Brent crude traded as high as $119 before retreating, one of the largest short-term increases on record. Reuters reports access through the Strait of Hormuz has been blocked/disrupted by the conflict, a critical chokepoint for global crude and LNG flows. The EIA estimates roughly ~20 million barrels/day of petroleum liquids moved through Hormuz in 2024, about ~20% of global petroleum liquids consumption, which is why even partial disruption can reprice the entire market. The spillover is already visible: U.S. gasoline has moved up into the low-$3s per gallon in the immediate aftermath.

• While Iran has stated that it is not “closing” the Strait of Hormuz, the issue comes down to insurers not willing to insure shipping through the route
• The US has attempted to mitigate this risk, with Trump announcing US government-aided insurance for ships
• However, the US effort will take time to form, and in the meantime, ships seem to be stranded in the area
• As shipping capacity is taken offline, refiners and petrochemical companies in the area and in Asia have been forced to declare force majeure
• This allows companies to temporarily halt production, delivery, or purchasing of products due to the war
• The supply chain disruption affects not just the prices of oil and its refined products: diesel, jet fuel, and gasoline, but also petrochemicals needed for plastics and fertilizer
• The longer the shutdown lasts, the longer the  potential for supply chain disruption that will feed through as inflation across the global economy

Economy unexpectedly lost jobs in February

The U.S. economy lost 92,000 jobs in February, a sharp miss versus economists’ expectations for +59,000, and a reversal from +126,000 in January (revised). The unemployment rate rose to 4.4% from 4.3%. The BLS noted health care employment fell, explicitly citing strike activity as a driver, while information and federal government employment continued to trend down. Coming into a week where energy prices are also surging, the report adds to the sense that the economy may be losing momentum at the exact moment inflation risks are re-accelerating.

• While the February print can be attributed to nursing strikes and extremely cold weather, it is still a notable cause for concern
• This will complicate the job of the Federal Reserve as the jobs picture signals a weakening economy that should warrant rate cuts, and the war increases the risk of inflation
• We may find ourselves in a situation where the Federal government will attempt to stimulate the economy while the Federal Reserve is forced to keep rates higher to counteract inflationary forces
• The trajectory of the next several job announcements will be very important to observe

Stagflation risk back to the fore

Stagflation risk is rising because the economy is caught in a classic energy-shock “policy trap”: higher energy costs push headline inflation up even as they slow growth by squeezing household purchasing power and corporate margins. Reuters’ Fed-focused analysis notes that the combination of weakening labor data and surging energy-driven inflation fears is forcing markets to reassess the path of rates, exactly the setup that can keep policy tighter than the economy wants. Economists quoted by Reuters estimate that a sustained 10% rise in oil can add roughly ~0.3pp to year-over-year headline CPI in coming quarters, even before second-round effects. The IMF’s Kristalina Georgieva put a similar marker down: a 10% oil increase sustained for most of a year could add about 0.4pp to global inflation and slow growth. Meanwhile, consumer inflation psychology remains fragile; Michigan’s survey shows year-ahead inflation expectations at 3.4% (still above pre-pandemic norms.)

• Stagflation is sticky inflation + softening demand
• Energy shocks are one of the fastest ways to get there
• A stagflationary environment also increases recession risks as inflation further dampens demand for goods and services
• As discussed above, the longer the Strait of Hormuz is closed, the larger the risk of inflation taking grip
• The US/Israel will have to take this into consideration as they determine the scale and scope of this war
• In prior crises, a meaningful decline in the stock market has led to a change in policy
• While we have seen some volatility in the stock market since the beginning of the war, the market is still trading within striking distance of all-time-highs

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