The Strait of Hormuz. Three words that should be on every trader’s watchlist this week.
President Trump signaled Thursday that he’ll decide within ten days whether to launch strikes against Iran. The U.S. military has deployed the USS Abraham Lincoln carrier group within striking distance. Vice President JD Vance says “certain red lines” remain in nuclear talks. And Iran’s Revolutionary Guard has already partially closed the strait for military exercises — a flex that sent oil prices up 5% on the week to their highest level in six months.
Here’s what the market is — and isn’t — pricing in.
More than 14 million barrels per day of oil and condensates pass through the Strait of Hormuz, about a third of total worldwide seaborne oil exports. Three-quarters of that oil goes to China, India, Japan, and South Korea. If Iran makes good on its threat to close the strait, the global oil market simply cannot balance supply and demand. Bob McNally, a former White House energy advisor, warns that Iran has “much better weaponry and much better coastline to operate from than the Houthis” who disrupted the Red Sea for months. Lloyd’s of London wouldn’t insure tankers through Hormuz in that kind of environment.
Lombard Odier’s worst-case analysis sees oil spiking above $100 per barrel, shaving 0.5% to 1% off global GDP growth, and pushing headline inflation higher. The Swiss private bank expects haven assets like gold, the Swiss franc, and the Japanese yen to surge while equities experience “intense volatility.” Rystad Energy models a more modest $10-15 per barrel spike in a wider conflict scenario. Either way, the energy sector trades higher, airlines get crushed, and consumer discretionary faces margin pressure.
But the base case from Wall Street is more sanguine. JPMorgan’s Natasha Kaneva says any U.S. action is likely “surgical and designed to avoid Iran’s oil production and export infrastructure.” Goldman Sachs doesn’t see a major sustained disruption in its base case. Energy Secretary Chris Wright has publicly said the world is “very well supplied with oil,” giving Trump “more leverage in his geopolitical actions to not worry about a crazy spike in oil prices.”
The real disconnect — and the real risk — is complacency. The VIX, the market’s fear gauge, is sitting just below its long-term average. There’s no meaningful risk premium being demanded by investors for what could be the most consequential geopolitical event in years. As Lombard Odier puts it, this complacency “raises the risk of a sharp repricing event.” When markets aren’t pricing tail risk, they tend to overreact when it materializes.
There’s also a political calculation worth noting. The November midterm elections loom large. Trump knows crashing the economy with a sustained oil shock before midterms would be self-defeating. That makes a negotiated outcome the most likely path — and markets are betting on it. But Iran’s calculus cuts the other way: a tanking U.S. economy is exactly what Tehran might want to engineer, giving it leverage in nuclear talks.
For traders, the setup is asymmetric. If diplomacy wins, you’re back to status quo. If it doesn’t, energy names and defense stocks catch a bid, gold and silver get another tailwind, and everything else takes a hit. “Most likely” isn’t “certain” — and the market is pricing in a certainty that simply doesn’t exist.