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Operation Epic Fury has created the largest oil supply shock in history, sending Brent crude above $100/bbl and introducing a macro risk vector that the consensus base case materially underestimates. Larry Fink presented bifurcated scenarios — either Iran is reintegrated and oil drops to $40 (abundance), or it remains a destabilizing threat and oil spends years above $100, approaching $150. Meanwhile, Donald Trump recently repeated threats to destroy Iranian energy assets if the Strait of Hormuz isn’t reopened soon, raising fears of a further escalation in the war.
While the conflict is threatening to cause severe economic damage around the world and missile strikes ripped across the Middle East over the weekend as Iran and its proxies lobbed attacks at the US and its allies — President Donald Trump has signaled he’s ready to make a deal with Iran, telling reporters Sunday aboard Air Force One that an agreement could come soon with Vance likely to help mediate the complex geopolitical situation. Until then, the closure of the critical Hormuz waterway will likely continue choking supply chains and the overall supply of energy, fertilizer and other critical commodities meaningfully.
As a result, financial markets have responded by discounting most assets in similar fashion, with even Nvidia falling to parity with the S&P 500 for the first time in a decade. Nonetheless, the current turmoil offers investors a great opportunity to generate outsized returns, if the US-Iran conflict at least partly resolves itself. Strategists at Morgan Stanley have even been as bold to forecast that the S&P 500 correction is nearing its final stage.
The US-Iran war has fundamentally reshaped global markets in four weeks. Since Operation Epic Fury launched on February 28, Brent crude has surged from $72 to above $112 per barrel and the S&P 500 has fallen roughly 7% year-to-date. Markets now sit at an inflection point: ceasefire negotiations have stalled, Trump’s April 6 deadline for Hormuz reopening is fast approaching, and the Houthis have fired missiles at Israel, which raises risks of a blockade to another major Middle East maritime corridor.
Brent is trading near $113 today, up ~$40 from pre-war levels. The futures curve has moved into steep backwardation, while implied and realized volatility convergence for Brent futures is at historic levels.
Structurally, traders are signaling higher oil prices along with large swings over the near-term.While Trump has extended his deadline to April 6th, this dynamic in energy markets is unlikely to change until ceasefire negotiations no longer remain at an impasse.
The sector rotation to Energy in response to this geopolitical situation has been shocking to watch. Year to date the S&P 500 Energy Index has reached all-time high, up over 40%, while the S&P 500 Info Tech Index has fallen by over 10% YTD with valuations for many software companies still at multi-year lows.
Further adding to what has been a tumultuous year for the technology industry, Google’s TurboQuant research paper sparked a sharp retracement in memory stocks after a stellar start to the year. TurboQuant describes a KV-cache compression algorithm that reduces AI inference memory requirements by 6x and delivers 8x faster inference on H100 GPUs with zero accuracy loss. Nonetheless, the jury is still out on whether the pullback is warranted given the HBM supply shortage and the potential for Jevons Paradox — where lower inference costs ultimately drive higher total AI usage.
Overall, the data paints a picture of an economy caught between a geopolitical oil shock likely to drive higher inflation and economic contraction, while the trajectory of the AI investment hangs in the balance.
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