Crude, Food Prices Jump As Looming Israel-Iran Conflict Spark 1970s Oil Shock Fears

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by Tyler Durden
Friday, Apr 05, 2024 - 05:25 PM

Larry MacDonald of The Bear Traps Report penned a very informative note last month that outlined, "2023-2024 look a lot like 1973-1974." He said, "We're one event away from a 1970s-style stagflation explosion..." History books remind us that the 1973 oil embargo shook the global energy market. 

We were reminded of MacDonald's note because the global benchmark Brent is currently being subjected to a major repricing event of geopolitical risk as Israel makes preparations for a potential retaliation by Tehran after a precision strike in Syria earlier this week killed top Iranian commanders. 

"The market now knows that some kind of retaliation from Iran will likely come, but it doesn't know when and where and what, and that creates a great discomfort and nervousness," Bjarne Schieldrop, chief commodities analyst at SEB AB, told Bloomberg. 

On Thursday, UBS desk trader Alexander Gray outlined several bullish factors into Brent's surge that has the benchmark around $91/bbl handle:

  1. Rally / buying right into the 14:30 New York energy close - suggests heavy index fund prepositioning ahead of GSCI roll onset tomorrow where energy will be weighted in the index

  2. Geopolitics - reports of potential attacks within Iran and also potential retaliation toward Israel following Monday's airstrikes.

  3. Bullish consensus and flow - a number of Street strategists have been out today talking about upside risk toward the $95-100 range in crude. Meanwhile, flows here have skewed toward upside buying in the options space

  4. Technicals - Front-month WTI crude oil just completed a 'golden cross' technical formation with the 50- and 200-day moving average crossover. The front month is aimed at $88.58 above; $91.08 is key as the 76.4% Fibonacci retracement level in Brent... which is precisely where Brent is trading at this moment..

Last week, JPMorgan Chase forecasted that crude oil would climb above $100 by September. And this is ominous, as, like MacDonald's note, we're just one shock away from stagflation. That shock, what the consensus now believes is possible, is a direct Israel-Iran conflict. And that could propel Brent well above the $100 mark. 

"If we get a direct conflict between Israel and Iran, that's something that will likely restrict the supply of oil coming from the Middle East," Matt Maley, an analyst at Miller Tabak + Co., told Bloomberg.

And this would be absolutely terrible for the Biden administration, which will likely have to drain the Strategic Petroleum Reserve—already at dangerously low levels—to mitigate gasoline prices at the pump from rising above the politically dangerous $4 a gallon national average, which would damage re-election odds. 

And it's not just Brent and WTI ripping higher on repricing geopolitical risks. In early March, we outlined that it was only a matter of time before Brent was repriced for mounting geopolitical risks (read here).

Furthermore, the inflation news worsens as the United Nations' Food and Agriculture Organization's global food index jumped 1.13% in March, the highest monthly gain since July 2023.

Energy inflation will feed into food production costs and likely increase prices. 

Meanwhile, a broadening and worsening conflict in the Middle East - something that appears imminent - will push crude markets higher - and America's enemies understand weaponizing the energy market is a powerful tool to spark the next financial shock. 

David Asher, a senior fellow at Hudson Institute and former investigator into Covid origins at the State Department, recently penned a note titled "Navigating the New World Disorder: Economic Faultlines, Fissures, Fractures, and Failures." 

Asher outlined that if broadening conflict in the Middle East materializes, then there is the very risk that the world's largest processing facility and the largest crude oil stabilization plant in the world, owned by Saudi Aramco - called the Abqaiq facility - could be subjected to missile and drone attacks from Iran-backed Houthis and or other Iranian proxies. 

Could Tehran use oil as an economic weapon against the West? The odds are certainly increasing. 

Consider the economic impacts of previous oil shocks...

To sum up, the Middle East conflict has undoubtedly entered a new dimension this week as a direct Israel-Iran conflict looms that could send Brent crude prices into triple-digit territory, which would help to re-accelerate inflation and unleash further pain for consumers across the West - similar to the 1970s.  

Let's hope this doesn't happen. If it does, it will wreck the Biden administration's re-election odds.