On the eve of the attack on Iran, the price of Brent oil stood at $72.5 per barrel, while yesterday it was a little above $100 per barrel, recording a rise of 38%.Yesterday, the yield on the 10-year U.S. bond was close to 4.962% from 3.962% on February 27, showing a significant increase of one percentage point.
The price of gold per ounce was at $4,350 yesterday from $5,230 on February 27, marking a drop of about 17%. Also, the price of bitcoin was close to $86 thousand yesterday versus about $66 thousand on February 27, gaining 30%.
For the first time since the conflict in the Middle East began, JPMorgan analysts disclosed that they do not have a baseline forecast scenario. The baseline forecast at the start of the conflict had $100 per barrel, a 5% yield on the 10-year U.S. bond, and a diesel price of $4.37 as red lines for the Trump administration. For this reason, they had predicted an agreement for the reopening of Hormuz last June.
However, we are heading toward the end of September and everything has been overturned. The price of Brent is at $100 per barrel and was $106 a few days ago, and the price of diesel in the U.S. is above $6. At least, the yield on the 10-year bond fell below 5%, but it is not certain how long that will last.
According to JPMorgan, the price of oil rises by $4 per barrel every time 1 million barrels are removed from the market daily. Already, 10 million barrels per day are missing from the market according to the same source, which considers $90 to be the equilibrium point. For the price to be at $100 per barrel, this means that the market is pricing in that an additional 2.5 million barrels will be missing from the market according to its reasoning.
With the U.S. and Iran showing no desire to de-escalate the crisis, the assumption of a temporary disruption in oil supply does not seem convincing to the American house.
One way to see what may happen is to take a look at the oil crises of the past.
In the 1973 oil embargo, the price of oil quadrupled to $12 from $3 and inflation rose to 12%. Borrowing costs at 10 years started at 6.8% and moved toward 8.5% the following year.
In the 1979 oil crisis with Iran, the price of oil rose to nearly $40 from $15 before, and inflation climbed to 13.5% with the Fed’s policy rate between 17% and 20%. The yield on the 10-year bond rose to 13% and above from around 9% previously.
If today’s turmoil continues and is not resolved, inflation will strengthen even more and the Fed will not remain idle. It will raise the policy rate in a period of large deficits. Therefore, bond yields and interest rates on mortgages and business loans will rise, slowing the economy, while the dollar will likely weaken.
In such a bad scenario, some predict that the big winner could be gold, which withstood the recent rate hike by the Fed. As in the 1970s. That is why they talk about a golden decade.
However, gold has already rallied.