TACO Or Regime-Change In Iran? Goldman's One-Delta Desk-Head Warns 'Other More Pertinent Issues Not Going Away'

As something close to the worst case scenario has begun to manifest in energy markets - sending oil prices up 25-30% overnight - Asian equity markets puked (and China CPI came in hot).

As Goldman's One-Delta desk-head, Rich Privorotsky notes this morning, shut ins across the Gulf from Kuwait, Iran and Qatar are now manifesting  a sizeable disruption... on a scale that eclipses most historical outages including major wars or the 1973 embargo. 

Hormuz/Iran

The asymmetric risk around the use of force in the Strait of Hormuz has effectively paralyzed transit through that chokepoint. Some progress on insurance and military escorts might partially resolve some of the supply but won't fix the problem . Over the weekend there were few signs of an off ramp. Iran reportedly elevated Ali Khamenei’s son, Mojtaba Khamenei, into a more prominent leadership role… the market is interpreting this as a continuation of hard line rhetoric rather than a path toward de-escalation. 

TACO/Regime Change

We are left with a face off in which both US and Israel appear to believe they can achieve strategic objectives that reshape the region in a permanent way.  Iran understands well that the longer they can force economic hardship/energy disruption the more untenable the Western position. The rhetoric from both sides suggests neither intends to stop short of those objectives. The reality, however, is that US policy is ultimately constrained by economic incentives and market feedback loops. Oil in the mid $150s would almost certainly trigger recessionary dynamics and rapid demand destruction.  

Reserve Release

Overnight there were reports of a potential G7 meeting where the US may propose ".. a joint release in the range of 300 million to 400 million barrels, or around 25% to 30% of the 1.2 billion barrels in reserve"(FT) Such a release would buy time. If the disruption proves temporary, a coordinated SPR release makes sense. If the disruption persists for months, those reserves might arguably be more valuable at higher prices or in a more acute shortage 

However, while Iranian-related actions (and consequences) are grabbing all the headlines, Privorotsky reminds traders that there is a lot more to worry about that is from reaching an off-ramp.

Risk

My instinct is that once the dust settles this likely proves to be a buying opportunity for many of the assets people wanted but to own (EM/Asia). The difficulty is duration.

[ZH: For now, the market is panicking...]

I'm of the view the US never wanted to end up in this position, and despite the rhetoric, structurally higher oil prices and the prospect of a deeply unpopular military escalation would be a headwind into the midterms. 

Reflexivity is an eventuality...my guess is that within days or weeks they will be searching for the first viable off ramp but is unclear what oil price will be before that occurs. Think first step is an SPR release.   

Big picture/with more duration we want to stay constructive around these levels… but with our trading hats on the focus has to remain risk management (think 150+ oil has to be in distribution).

My hope is we are at peak fear on the oil side, reserve release will help short term but my concern is that we have other more pertinent issues that are not going away.  

1.) NFP was nearly -100k and although there were a few funnies in it from the birth-death model and weather distortions; it was still weaker than we could have expected

2.) AI disruption is real and continuing, terminal value debate isn't going away

3.) Private credit/credit in general is having a bit of an issue (See fund gating  last week)...note private credit sold off a lot more aggressively than public credit.  

CPI later in week but clearly not the focus. 

Finally, Privorotsky points to one potential stabilizer for markets is positioning.

PB saw nearly -400bps of fundamental long/short underperformance last week alongside record ETF shorting and broad macro de-risking.

By Friday, when the news flow felt most negative, markets were already struggling to move materially lower: i.e. we needed a massive oil spike to gap down...sadly we got one. 

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