The US Must Be Confident It Has A Plan In Place To Lower Oil Prices Once It Strikes Iran

By Michael Every of Rabobank

Lots Of Xs Vs Lots Of Ys

US vs. Iran: The media today talk of a “90% chance of war” and “as soon as Saturday.” We’ve long stressed there’s a high likelihood of a fresh US-Iran conflict, recent US logistics movements said soon, and an Axios headline yesterday refocused oil markets on it. The balance of risks now tilts to a US strike after market close Friday, even if the materiel moved to the Middle East suggests any attack is likely to last weeks rather than being over by the Monday open. One caveat is Secretary of State Rubio is set to meet with PM Netanyahu in Israel on February 28, hard to achieve if missiles are flying. Yet Israel is preparing for exactly that. Indeed, expectations are Iran will retaliate across the region, potentially via terror cells in the West (including in Europe), and perhaps in Hormuz directly if the regime sees itself as at risk. The broader region is flammable too, with tensions running: Egypt vs Ethiopia vs Eritrea; Somalia vs Somaliland; Sudan vs South Sudan; Yemen vs South Yemen; and the Saudis (and Turkey and nuclear-armed Pakistan) vs the UAE (and Israel and nuclear-armed India).

To say that this could be market- and geopolitics-moving is an understatement. Oil, and presumably LNG, prices would spike. How quickly they come down would depend on exactly how this plays out. The US must be confident that it has a plan in place to mitigate these kinds of risks. It certainly did, in a much less risky environment, in Venezuela.

The Fed: The latest minutes were significantly more hawkish than expected. Indeed, the Bloomberg take, accurate or not, is that several members may be leaning towards rate hikes not rates cuts. Given we are months away from the appointment of a new Fed Chair who wants to see the latter, that sets the Eccles Building up for some serious conflict ahead. Indeed, note the colliding views on what the AI revolution means for the US economy. Warsh, based on some optimistic thinking, says it means lower rates; Barr and Daly, based on surrealistic thinking, say it means higher rates. Our US strategist is sticking with 3 cuts this year for now, starting from June (see here).

The ECB: President Lagarde is going to step down early, setting off a scramble for succession. Our ECB team do an excellent job of working through the labyrinth of Byzantine European monetary politics in this report. In a nutshell, it’s not so much about policy preference, or protecting the ECB from the pollutant of political populism, nor about the presidency per se; rather, it’s potentially perpetuating an ECB executive board seat for France. And what would any key European decision be without France trying to do that? C’est la guerre, c’est Lagarde. (And does she have a better gig lined up? The whisper had been Davos leadership, but post-Trump’s stomp on it, is that still a step up?)

The RBA vs. the government: Strong wages growth and jobs data keep the pressure on the Reserve Bank. Private sector wages were +3.4% y-o-y in Q4 and public sector +4%. Jobs growth in January was 17.8K, broadly in line with expectations, but with a surge in full-time employment of over 50K, while unemployment fell a tick to a near-historic low of 4.1%. Yes, there are questions about data quality, population growth, and AI, even if Australia is hardly at the cutting edge in that key area. But what excuses can the RBA keep finding not to be hawkish, even if that eventually sets up a collision with the housing market? There’s already one underway between former RBA Governor Lowe and the government, the former saying the latter needs to stop spending to get rates down again, the latter saying that’s just a personal vendetta.  

The BOE: Reform Party not-Shadow Chancellor Jenrick pledged to retain BOE independence and the Office for Budget Responsibility, while…. drum roll… reforming both. The BOE will be stripped of political goals and a climate mandate, with a focus purely on inflation: QE was mentioned as a bad thing. The OBR is to change its models, with competitions to see which forecaster is most accurate in calling growth and the budget deficit right (as if it’s the salary that makes forecasting hard). He also spoke of making The City a ‘crypto leader’… but is that in Bitcoin, dollar stablecoins, or Euro or sterling ones? Expect major collisions on that front both between legacy banking and crypto, and between crypto players… albeit only from 2029 onwards, barring a political shock.

France vs Germany: Aside from ECB politics, Chancellor Merz has just said that the Eurofighter project that was supposed to be built between France and Germany ‘fails to meet Germany’s needs’. That follows similar recent spats over protectionism and trade deals. More broadly, as Germany rearms, adding military muscle to its existing, if shrinking, economic heft, Franco-German tensions are only going to increase on multiple fronts, forging new intra-EU alliances to emerge.

Canada vs the US: ‘Carney offers to ‘broker a bridge’ to build giant anti-Trump trade club’ – joining the EU with the CPTPP’s Canada, Mexico, the UK, Australia, New Zealand, Japan, Vietnam, Singapore, Malaysia, and other Pacific nations. Really? Mexico is deepening trade integration with the US behind a de facto common external tariff. The UK is trying to get back in with the EU via dynamic regulatory alignment, but the benefits are likely to be low given businesses know Reform could win the next election and reverse it. Japan is all in on the US. Australia is close to an FTA with the EU, NZ has one, and both rely entirely on the US security umbrella. The smaller Asian economies are linked to China, with US trade deals not allowing transshipment. And almost all those countries want to net export to the US. With USMCA renegotiation months away, does Canada think this is leverage when the US holds the best cards?

Green vs not green: ‘US pressures global energy body to drop net zero modeling’. “US Energy Secretary Chris Wright made the call to other energy ministers at a closed-door ministerial meeting of the International Energy Agency in Paris on Wednesday, two people who were part of the discussions told POLITICO. The comments met with a muted response from other ministers, the people said…. It comes just a day after Wright publicly threatened to quit the organization unless it abandoned its focus on the energy transition… Wright said the agency should stop basing its modeling on assumptions that it’s possible to cut emissions to zero, arguing such targets will never be met… Doing away with those baseline assumptions would be a significant shift for the IEA, which has made them central to forecasts that have in turn formed the basis of global political decision-making around the green transition and underpinned billions in green energy investments.”

Free speech vs hate speech: Welcome to glasnost, reverse-Gorbachev style. Reuters reports the Trump admin is to set up a website, Freedom.org, as a portal which everyone globally can use to access whatever information or apps that they want, regardless of what their own governments won’t let them see for various reasons. This would apparently operate via a permanent VPN. Obviously, this is going to cause tensions with the likes of China, Russia, Iran, and North Korea… and Australia, the UK, and much of Europe. (Many readers will nod at immediately: but stop for a moment and think just how bizarre that would have read 10 years ago.)

Young vs. Old: ‘Over 65? Congratulations, You Own the Economy’. As the Wall Street Journal puts it, “The elderly are physically and financially healthier than ever. So why do their needs keep taking priority over younger generations?”