What an incredible 3-day stretch in the oil market. I have been through a lot of oil sell-offs, including the crazy ~12% down (in 1 day) sell-off in 2021 and the bloodbath in 2018, but this one shocked me.
From the start of the Iran War, I wrote that with each passing day there’s no diplomatic resolution, the probability of one goes down. Iran managed to pull off an incredible feat of draining global oil inventories without being bombed into oblivion. They managed to get a regime change in the US before the US achieved one for Iran.
What was excruciatingly frustrating for me through the past few days was that I had predicted a democratic sweep. Some readers may recall my Robinhood bet on the Democrats winning the Senate. I have no political affiliation, and I’m just betting on where I saw a mispriced market. And yet, despite that, I completely failed to read what it meant for the oil market.
For the oil market, instead of looking at Iran’s tactic on the US midterm election results as something that poses an existential risk to the fabric of the US democratic system, the market instead thought that Democrats would force Trump to end the war.
When I wrote my game plan piece last week, I envisioned a scenario where the Democrats win, and the market might see a temporary reprieve from the possibility of less escalation, but I didn’t see this ~18% drawdown.
If you saw this sell-off, kudos to you.
But as with anything in markets, I strongly believe this initial reaction is wrong. Let me just frame the context for you, geopolitically speaking:
Iran’s maneuver in the Strait of Hormuz forced diesel and gasoline prices higher, which soured voter sentiment.
Iran is demanding control of the Strait of Hormuz as a permanent deterrent against future attacks, because... you guessed it, it can use this card again in future conflicts.
Going forward, in all future US elections, Iran can use this card again if it chooses to influence voter sentiment toward the ruling party.
Let’s just stop there. That’s a non-starter.
The most powerful country in the world, with the most powerful military, does not let a country that’s demonstrated visible political intervention dictate the terms of negotiations. Set aside the argument that kinetic action will do nothing but worsen the current situation; optically, this is a humiliation for the Trump administration. If he is to back down today, like the oil market is saying he would, think about the ramifications:
The US and the rest of the world will be held economically hostage forever.
Trump’s legacy will be to have empowered Iran.
Again, nonstarters. I don’t think the oil market is thinking about this coherently at all. Does Democrats winning increase the pressure on Trump to resolve this conflict? Yes. But will there be material changes to the current situation? No.