Iran’s Provocation Sends Global Economy Into Black Hole... Soaring Oil Prices, Rising Dollar

The global economy has entered a state of zero visibility as Iran’s new leader signals a hardline response to the United States and Israel, including talk of opening a "second front." Concerns over a prolonged war have driven international oil prices sharply higher, while demand for safe-haven assets such as the dollar has increased. With some projections suggesting oil could surge to 150 dollars per barrel, worries over inflation are intensifying, and expectations for a U.S. interest rate cut are steadily diminishing.

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◆Iran’s Provocation, U.S. Reassurances, and Market Distrust= On March 12 (local time), the price of West Texas Intermediate (WTI) crude for April delivery closed at 95.73 dollars per barrel on the New York Mercantile Exchange, up 8.48 dollars, or 9.72%, from the previous session. May Brent crude futures jumped 9.2% to finish at 100.46 dollars per barrel. This marks the first time since August 2022 that Brent crude, the global benchmark, has closed above 100 dollars per barrel.

The first public statement by Iran’s Supreme Leader, Seyyed Mojtaba Khamenei, rattled the markets. He declared, "The Strait of Hormuz must remain blocked as a means of pressuring the enemy," and added, "All U.S. military bases in the Middle East must be closed, or they will be attacked." He further emphasized, "We have completed our review of forming a vulnerable 'second front' that the enemy has never experienced."

With oil prices surging in response to Iran’s provocation, the U.S. administration moved to calm the markets. Caroline Levitt, White House spokesperson, stated, "For national security, the White House is considering temporarily waiving the Jones Act to allow essential energy products and agricultural goods to flow freely into U.S. ports." The core of the Jones Act is that vessels transporting passengers and goods between U.S. ports must be built in the U.S., U.S.-flagged, and owned by U.S. citizens. Easing this restriction would enable foreign vessels to transport energy products, including oil, into the United States.

U.S. Treasury Secretary Scott Bessent once again raised the possibility of "naval escorts." In an interview with the UK’s Sky News, he said, "As soon as it becomes militarily feasible, I believe the U.S. Navy, likely in cooperation with an international coalition, will begin escorting vessels (in the Strait of Hormuz)." He emphasized that the potential impact of the ongoing war on oil transportation has been analyzed "across various scenarios for weeks and months," and reiterated that "the U.S. will ensure the safe passage of oil tankers through naval escorts as soon as possible."

Emergency measures such as export restrictions, waiving the Jones Act, or releasing strategic petroleum reserves are considered only temporary solutions. Alex Jacquez, Director of Policy at Groundwork Collaborative, commented, "The impact of (the Jones Act waiver) on retail gasoline prices is less than two cents per gallon," calling it "minimal." There is also uncertainty over whether the U.S. Navy will actually provide escorts. On this day, Energy Secretary Chris Wright told CNBC that the U.S. Navy is not currently prepared to escort oil tankers.

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◆Rate Cuts off the Table amid Inflation Fears= Despite U.S. actions, market anxiety remains high. Goldman Sachs has raised its oil price forecast, warning that if oil flows through the Strait of Hormuz remain reduced throughout March, international oil prices could surpass the 2008 peak of 147.5 dollars per barrel. The International Energy Agency (IEA) warned that the current disruption to oil supplies is the largest on record.

The surge in oil prices has also driven up the value of the dollar. The Dollar Index (DXY), which measures the dollar’s value against six major currencies, is likely to surpass 100 for the first time since November last year. On this day, the index climbed 0.5% from the previous trading day to 99.74. It was 97.61 on February 27, just before the U.S. and Israel attacked Iran, then jumped to 98.38 on March 2 and has continued its upward trend.

The increased demand for safe-haven assets is partly due to the oil price surge, but also reflects higher demand for the dollar, which is the main currency for oil transactions. April gold futures are trading slightly lower at around 5,100 dollars per ounce compared to the previous session. As the world’s largest oil producer, the United States sees increased oil demand translate into higher demand for the dollar.

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The rising value of the dollar is expected to negatively impact Asian economies. Chris Turner, Head of Global Markets at ING, said, "The longer oil prices remain at these elevated levels, the more growth will be eroded for energy-importing countries in Europe and Asia. The impact will be much greater than on the U.S. economy."

The likelihood of a U.S. interest rate cut is also waning. Global investment bank Goldman Sachs now expects the Federal Reserve to lower rates in September and December this year, pushing back its previous forecast of cuts in June and September. Goldman Sachs explained, "Given the upwardly revised inflation outlook, starting rate cuts in June is too early."

The market is taking an even more conservative view. According to CME Group’s FedWatch, the market now sees a 79.8% chance that the Federal Open Market Committee (FOMC) will keep rates steady at 3.50-3.75% at its meeting in June. This is a significant increase from 37.7% a month ago. Expectations for a rate cut in September have also diminished. A month ago, the probability of a cut to 3.00-3.25% was 36.4%, and to 3.25-3.50% was 32.7%, but these have now fallen to 7.0% and 34.1%, respectively, while the probability of no change has surged from 10.15% to 58.4%.

There are growing concerns that if crude oil production in the Persian Gulf is disrupted for an extended period, it could trigger severe inflation across the global economy. Prolonged energy supply disruptions would be reflected in everyday prices, such as food. Goldman Sachs forecasts that if international oil prices remain around 100 dollars per barrel, global growth could be reduced by about 0.5 percentage points over the next year, while inflation could rise by nearly 1 percentage point. Matt Maley of Miller Tabak said, "The biggest problem facing the market right now is clearly the war," adding, "With no sign of easing in the Middle East conflict, oil prices have soared and stress in the credit markets is also mounting."

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