Geopolitics Eclipses AI

War with Iran

With the outbreak of hostilities, it appears that the Strait of Hormuz has been effectively shut down. This means that a fifth of the world’s total oil consumption (and nearly a third of all seaborne crude oil trade) is no longer moving. OPEC+ has signaled only a slight increase of output of 206k barrels per day, but it is not enough to make up for the supply shock.

For perspective, it’s estimated that roughly 20 million barrels of crude oil and refined products flow through the Strait every single day. If the conflict does last for a long time, we are likely to see oil prices jump significantly, with some analysts already forecasting surges well over $100 per barrel.

To understand where markets might go from here, it is helpful to look back at the historical precedents set by the 1990-1991 Persian Gulf War and the 2003 Iraq War.

During the 1990-1991 conflict, the world experienced a massive drop in gross oil supply. Oil prices spiked leading up to the war but actually dropped to an average of $22 per barrel during the military conflict itself. That price stabilization was largely saved by Saudi Arabia rapidly ramping up production and the U.S. tapping into its Strategic Petroleum Reserve. The critical difference today, however, is that there appears to be far less excess oil production capacity available globally than there was in 1990. This means a similar production rescue by neighboring nations will be much harder to pull off.

We will likely see the trends found under the war puzzle phenomenon on the equities side. Equity markets were extremely jittery and weighed down by anticipation prior to the 2003 Iraq War. A large buildup of military assets in the area had been going on in the background as well. The stock market rebounded sharply the moment military action actually commenced back in 2003. The Dow Jones Industrial Average surged 8.4% following the invasion, because the start of the war resolved the uncertainty and investors bet on a quick victory.

The current situation with Iran is playing out quite differently. Uncertainty is increasing daily at the moment and clarity on the overall objective or trajectory is completely absent. Wars that break suddenly tend to cause stock prices to decrease as investors scramble to assess the newly introduced unforeseen risks according to the War Puzzle research. It is entirely unclear where things will go from here (especially with the de facto blockade of the Strait of Hormuz threatening to suffocate the global commodity chain). I do not expect we will see a relief rally. We will probably see a swing into the typical defense sector stocks. I am expecting a general overall selloff at least for the next few days.

Blue Owl & Private Credit

News broke earlier this week that Blue Owl was limiting withdrawals from one of their private credit funds. This sparked fears across Wall Street. Even Treasury Secretary Scott Bessent said he was concerned about the development. It feels like a call back to 2007 when a hidden and murky aspect of the banking industry starts to show cracks. I do not think we are at a point yet where this is a red alert. Similar red flags have flown before (namely when Silicon Valley Bank imploded in 2023) and we made it through that relatively fine. I will monitor for contagion before getting really worried. This is definitely a sector to watch closely.

Rapid Fire Observations

Some quick top-level thoughts on other big things that happened last week:

• Block’s Layoffs: I did a more in depth write up on this in Friday’s Signal Brief. I think we are officially in an era where companies brag about AI taking jobs. The market rewarded Block ($SQ) by jumping 16% on the news. I expect we will see several other companies following suit. The divergence between Wall Street and Main Street widens.
• AMD & Meta Make a Deal: The circular AI dealings will continue until morale improves (or something like that). Meta () and AMD () announced they struck a deal in which Meta will buy 6 gigawatts of compute from and take a 10% stake in AMD. All of the hyperscaler balance sheets will soon contain some significant stake in the chip manufacturers. They are building a knot that will be exceptionally gnarly to untie.
• Nvidia earnings: Nvidia reported substantial revenue growth of 73% YoY but saw their stock drop 7%. This continues the trend of a jittery market punishing anything less than perfection. It is about time some air is let out of the balloon. The reasoning for why it is happening now is dubious though.

What’s Happening Next Week

The major catalyst is the conflict with Iran and how things develop there. That will ultimately drive how the market reacts. Expect some selling if it looks like we are barreling toward a long and drawn out conflict. Any signs of optimism will move the market upward. I do not expect we will see any of that until the middle to the end of the week (if we see it at all).

CrowdStrike () reports earnings on Tuesday. This report would have been interesting to see if the SaaS-pocalypse feelings continued or if things trended opposite the current trend. It remains an important bellwether earnings report for the sector. It will just be nearly impossible to glean a meaningful signal with everything else going on.

The Last Word

Geopolitics has officially shoved AI off the front page. We have spent the last year obsessing over compute capacity and software margins. Now we are back to counting barrels of oil and assessing military blockades. The market hates uncertainty above all else and right now uncertainty is the only thing in abundant supply.