Let me keep this simple. Available oil is trading over $100 a barrel, and the S&P 500 is not going to rally meaningfully until that number comes down meaningfully. The longer the price stays here, the higher the probability that the global economy tips into recession. Everything else on the screen is a second order question right now. Oil is the first order one.
For crude to come down and stay down, three conditions have to be met and verified. No nuclear weapons, verified by a government that can be trusted on the verification. A free flow of oil through the straits without threat. Control of Iranian oil exports. We are nowhere near any of the three. Each one is a supply question, which is why the oil market prices them directly and why no amount of commentary moves the barrel until they change.
The third condition gets the least attention and matters the most. Iran sells 95% of its oil to China. That is an enormous amount of cash changing hands, and it is not changing hands in dollars. Where does that money go? Into banks, and the banks are not in Tehran. Dubai, possibly Cyprus, possibly elsewhere. Until you control the cash, you do not control the oil. Until you control the oil, you have no leverage over the party selling it. This is a story about money and control of a physical resource, and it should be analyzed that way.
On the path from here, I would rather be honest than tidy. The free flow of oil condition has real work left in front of it, so I am not expecting crude to ease soon. My view is that closing the accounts that move this cash is the fastest available route to a calmer Gulf. I could be wrong on the sequencing. What I am fairly confident about is the read on equities. Weak markets are getting explained away as something other than what they are. I think valuations were set for a cleaner world than the one we actually have.
