Comparison of the US-Iran War with historical wars: Is the trend of stocks, bonds, and oil more similar to the Gulf War period?

The risks facing the oil market at present are undoubtedly higher than ever. While the Trump administration in the United States is seeking peaceful negotiations with Iran, the White House is still assembling more troops in the Middle East. According to U.S. Department of Defense officials, the Pentagon is considering deploying up to 10,000 ground troops to the Middle East, including infantry and armored vehicles, to provide more military options. These troops will enhance the military capabilities of the approximately 5,000 Marines and thousands of paratroopers already deployed to the region. Speculation suggests that future activities may take place near Iran and its energy hub in Kharg Island. At the same time, traders are also warning that with each day of conflict, energy shocks will intensify, pushing the global economy, as well as stocks and bonds, into greater danger. As we approach the one-month mark since the outbreak of hostilities on February 28th, let's take a brief look back at the similarities and differences between this conflict and historical geopolitical conflicts: Historically, the largest oil supply disruption crisis The International Energy Agency stated in mid-March that the closure of the Strait of Hormuz has resulted in the most severe supply disruption in the history of the global oil market. (The image shows from left to right: Suez Canal crisis, Arab oil embargo, Iranian Revolution, Gulf War, Iran-Iraq War) The Strait of Hormuz is a crucial chokepoint that meets about 20% of the global daily consumption of 100 million barrels of oil. Currently, tanker traffic through the strait has been significantly reduced. Although Saudi Arabia has redirected some supplies through existing pipelines to other export terminals, analysts, including Rapidan Energy Group, say that up to 10 million barrels or more of oil supply is still hindered daily in the Middle East. Threats by Iran against tankers and the shutdown of major oil production facilities in the Middle East could cause far-reaching effects on the oil and natural gas markets even after the conflict ends. Unlike previous disruptions that lasted for months or longer, during the actual blockade of the Strait of Hormuz, Saudi Arabia and other major crude oil exporting countries have very limited capacity to increase their spare production capacity. Comparison of oil price spikes Since the beginning of the year, global benchmark Brent crude oil futures prices have soared by about 80%, even though reports of negotiations between the U.S. and Iran had triggered significant sell-offs. As shown below, since the start of the conflict at the end of last month with drones and missiles flying frequently over the Strait of Hormuz, the current price surge is most similar to the period after the Gulf War in 1990. The Gulf War was a limited war launched by a coalition of 34 countries led by the U.S. against Iraq from August 2, 1990 to February 28, 1991. The main participants included multinational forces and Iraq, deploying about 660,000 and 860,000 troops each. At the same time, the current oil price surge actually surpasses the Russia-Ukraine conflict in 2022. However, before the outbreak of the Russia-Ukraine conflict in 2022, the global economy was experiencing a strong recovery post-pandemic, with oil prices much higher than at the beginning of this year. However, even though most of the expected oil supply disruptions did not occur that year, prices remained high for several months. Comparison of U.S. stock trends On Thursday of this week, the S&P 500 index and the Nasdaq index recorded their largest single-day declines since the U.S.-Iran conflict on February 28. Looking at the trend of U.S. stocks since the outbreak of this conflict, the sell-off process is similar to the negative reactions seen after past geopolitical conflicts. Before the start of this conflict, the S&P 500 index had experienced a pullback due to concerns that artificial intelligence could disrupt industries such as software and financial services. Investors say that since the start of the conflict, the high valuation of the U.S. stock market has further exacerbated some volatility. Overall, the magnitude of the pressure on U.S. stocks from current geopolitical conflicts is lesser compared to the Gulf War in the 1990s. In contrast, by the time of the current stage of the Russia-Ukraine conflict, the S&P 500 index had remained relatively flat. However, considering that this conflict exacerbated inflation, leading to declining corporate profits and rising borrowing costs, the S&P 500 index still fell by 21% in the first half of 2022. Comparison of U.S. Treasury sell-offs As shown in the chart below, the increase in the yield on 10-year U.S. Treasuries since the outbreak of the U.S.-Iran war is roughly comparable to the same stage during the Russia-Ukraine conflict and the Gulf War. One difference is that before the Russia-Ukraine conflict in 2022, the yield on U.S. Treasuries remained low as the Federal Reserve attempted to revive the economy after the pandemic. However, the prospects for interest rates are uncertain and the yield is already at a high level. Even so, the selling pressure on U.S. Treasuries remains unabated, with the yield on 10-year Treasuries climbing to one of the highest levels since July last year. After Iraq's invasion of Kuwait in 1990, the increase in the yield on 10-year U.S. Treasuries was even faster, as the U.S.'s dependency on energy was much higher at that time. Strategic oil reserve sell-off intensity rivals the Russia-Ukraine conflict The United States has pledged to contribute a record amount of crude oil reserves to the International Energy Agency's member countries about 172 million barrels. The released oil reserves are stored in salt caverns near the Gulf of Mexico in the U.S., slightly smaller in scale than the emergency release authorized by former President Biden during the Russia-Ukraine conflict in 2022. From a historical perspective, the scale of these two releases is significant, indicating that the White House is becoming more proactive in using strategic reserves to address price shocks or economic threats. This article was reprinted from "Cai Liang She", author: Xiao Xiang; GMTEight editor: Feng Qiuyi.