The current geopolitical conflict has triggered a 20 million barrel per day collapse in oil supply, a shock described as larger than the 1973 and 1979 crises combined. Unlike the COVID-19 demand shock, this supply-side crisis will rapidly deplete global inventories, leading to a situation where physical shortages, not just high prices, become the primary market driver.
The resolution of the crisis hinges on negotiations between the U.S. and Iran, whose initial positions are far apart. Time is a critical factor, favoring Iran as dwindling global oil inventories increase its leverage and put immense pressure on the U.S. and its allies to make concessions.
The 2022 freezing of Russian assets fundamentally altered the behavior of sovereign wealth funds (SWFs), who are now avoiding U.S. Treasuries in favor of gold and other assets. This crisis exacerbates the trend, as Middle Eastern SWFs will have less capital and be less willing to recycle it into Western markets, potentially causing a global credit contraction.
The crisis is reframing the energy transition from a climate-focused issue to one of national security, echoing its origins in the 1973 crisis. High prices and supply insecurity will turbocharge investment in domestic energy sources like renewables, nuclear, and natural gas, particularly in energy-poor emerging markets.
A major market rotation is anticipated, away from overvalued tech stocks and towards undervalued energy and industrial companies. U.S. large-cap tech, which comprises 41% of the equity market, has significant earnings exposure to energy-importing regions, while energy companies make up only 3% of the market and trade at low multiples.
Keep pulling the thread on Jeff Currie.