'Is There An Off-Ramp?': JPMorgan Traders Remain 'Tactically Bearish' As Market Sees Just 50% Odds Of Ceasefire By May

The escalation in the Middle East has moved the world into the initial stages of an energy crisis.

The Strait of Hormuz also has a material impact on fertilizers, helium, and industrial chemicals; a food and manufacturing crisis seems likely to follow.

About 1/3 of global fertilizer, 1/3 of global ammonia, and half of global urea are shipped via SoH

But, over the weekend, the most significant developments were:

(i) the US attacking military targets on the island of Kharg, an island representing ~90% of Iranian oil exports, escalating the conflict;

(ii) Iran’s retaliation, targeting UAE’s Fujairah, which is one of the most important oil hubs in the Middle East;

(iii) US repositioning an amphibious assault team to the Middle East, which may be viewed as a precursor to a US-led ground assault.

(iv) sanctions were reduced / dropped against Russia and Venezuela, in an attempt to lower oil prices.

Returning to military targets:

• Ras Tanura in Saudi Arabia. 6mm – 7mm bpd. World’s largest oil export terminal.

• Abqaiq in Saudi Arabia. 7mm bpd. World’s largest crude processing facility.

• Fujairah in UAE. 1.5mm bpd. Key hub that sits outside SoH allowing oil to bypass the Strait. This facility was attacked and had a partial shutdown.

As the market attempts to digest all of that, the biggest question remains: 

Is there an off-ramp? 

JPMorgan's traders believe the answer is unclear.

The US alone cannot pivot away from this situation, it will require both Iran and Israel to agree.

For example, Trump cannot claim a victory and walk away as that would not guarantee safe passage for US vessels, nor its allies.

Iran seems to have expanded its conditions for a ceasefire from an ending of hostilities from US and Israel to now wanting an end to the American military presence in the Middle East, plus payment for rebuilding destroyed infrastructure.

As we look forward, further escalation likely targets oil infrastructure and / or civilian water supply.

The Administration appears to be searching for an off-ramp but that may take a few more weeks, per Energy Sec. Wright.

• Trump Suggests Iran Ready to End War as Tehran Sees No Talks (BBG)

• Exclusive: Trump rejects efforts to launch Iran ceasefire talks, sources say (RTRS)

• Energy Secretary Chris Wright says Iran war will likely end in weeks (Politico)

• Energy secretary on gas prices: ‘Americans will feel it for a few more weeks’ (The Hill)

Options and prediction markets are implying ~50% chance of a ceasefire within 2 months...

What’s the US political response?

While this conflict is not popular, proxied by polling results, there will be bipartisan support for American soldiers.

Watch for an emergency military funding request, where the size may be an indication for how long the Administration thinks it will take to end this conflict.

Media chatter is around a $50bn request. For reference, in the first 6 days, $11.3bn was spent on ammunition.

As Trump asks for international assistance in reopening the Strait of Hormuz, some countries are electing to negotiate with Iran directly (India, Italy, and Spain).

Part of this decision may stem from the change in political preferences among allies with key relationships seeing China as a more dependable partner, per Politico.

SHORT-TERM CONFLICT

Conflict can end via (i) successful US military assault OR (ii) a diplomatic solution.

Recent headlines suggest US military assault is the more likely outcome in this scenario.

LONG-TERM CONFLICT

If the US cannot achieve a short-term victory, it seems likely that it will be forced to attempt a ground war to reopen the Strait of Hormuz.

If so, this could transform into a multi-year war if we use Russia / Ukraine as a proxy.

Iran is 2.7x larger than Ukraine with a predominantly mountainous terrain, especially near the borders of the obvious US entry points (Iraq / Turkey), though Iraq has blocked the US from staging a ground assault from its territory.

With all that said, JPMorgan's trading desk reiterates their Tactically Bearish call.

Their call is driven by:

(i) commodity shortages devolving into a global energy crisis;

(ii) an inflationary spike that may inhibit near-term consumption leading to a worsening economic outlook and degradation of earning forecasts; and

(iii) positioning reflects a market that appears under-positioned for an energy shock / market pullback / de-risking.

Further, systematic investors could push major indices to an overshoot on the downside increasing the chances of an official correction.

This investment hypothesis may receive ancillary tailwinds from continued dollar strength and / or a yield curve that bear flattens.

Professional subscribers can read the full 'JPMorgan Market Intel Briefing' note here at our new Marketdesk.ai portal