Israel and the US have struck many of Iran’s most important nuclear facilities across the country, including its hardest-to-hit enrichment site Fordow, the biggest enrichment site at Natanz, factories for making centrifuges which enrich uranium, and other key facilities which would be needed for a nuclear weapon. But the full extent of the damage to the country’s nuclear program – or Iran’s ability to secretly build a nuclear weapon – remains unclear. Oil prices have fallen from their recent highs amid easing fears of an imminent disruption to crude flows from the Middle East. US Treasuries and the dollar rose as a result. Despite the uncertain outlook for inflation related to energy prices, US bond yields dropped across the curve, as the markets slightly lifted bets on Federal Reserve rate cuts. We note that energy prices would need to rise significantly to negatively impact equity markets on a notable basis, as denoted by the red boxes in the right-hand graph above. This is not currently a dynamic we are seeing in the crude markets given the recent developments.
Despite a ceasefire announcement on June 23rd, hours after the truce went into effect, Israel said Iran had fired missiles at the country and promised to “respond with force”. Meanwhile, Iran accused Israel of attacking it in three waves. President Trump has warned Israel not to drop bombs on Iran and said he had told Prime Minister Benjamin Netanyahu to recall inbound Israeli planes. The US has reiterated that it wasn’t seeking a regime change in Iran, and the global capital markets appear to be assessing that the risk of the conflict spreading and engulfing the entire region remains low overall. The Middle East accounts for about a third of global crude production, with nearly 27% of global maritime oil trade sailing through the Strait of Hormuz. According to AIS tracking, there haven’t yet been any direct disruptions to physical oil flows through the strait, despite delays and congestion being reported for the merchant fleet traversing through this crucial chokepoint.
Fig. 1: Targeted Iranian Nuclear Sites Fig. 2: US Crude Oil Pricing vs S&P 500 Index
Sources: Newsweek, EIA, Bloomberg
