CRACKING
From various media sources:
- As revealed by the Guardian this week, a similar assessment had been made by the UK’s national security adviser, Jonathan Powell, who attended the final stages of the nuclear talks. According to sources, he had been surprised at the significant progress towards a permanent, substantive nuclear deal and judged that it was enough to halt a war between the two sides.
The US negotiating team consisted of Trump’s special envoy, the real estate developer Steve Witkoff, and his son-in-law Jared Kushner. They reportedly brought no experts with them.
Sources said the Iranians had agreed to highly significant concessions including a reduction and pause on their enrichment of uranium and also offered the US the chance to participate in a future civil nuclear programme, in exchange for a lifting of sanctions and unfreezing of assets.
A final phase of negotiations had been planned for the following week in Vienna, but 48 hours after the talks finished, the US and Israel began their strikes on Iran.
Albusaidi blamed “Israel’s leadership” for persuading Trump to join the war on the false basis that Iran’s regime would offer an “unconditional surrender” after the assassination of its supreme leader Ali Khamenei.
“The American administration’s greatest miscalculation, of course, was allowing itself to be drawn into this war in the first place,” he wrote. “This is not America’s war, and there is no likely scenario in which both Israel and America will get what they want from it.” (…)
As the war in the Middle East has dragged on with no clear end in sight, Oman has stood out from other Gulf states in its increasing willingness to condemn and criticise the US, the closest and most important ally for the Gulf countries, accusing it of being a proxy for Israeli interests in the region.
In comments to reporters last Thursday, Albusaidi said the US was intent on causing irreversible damage to international law and helping Israel re-order the Middle East to its own benefit.
“Oman’s view is that the military attacks against Iran by the United States and Israel are illegal and that for as long as they continue to pursue hostilities, those states that launched this war are in breach of international law,” he said.
- Yesterday’s Netanyahu presser:
Question: President Trump said today he did not like the Israeli strike on the Iranian gas fields. My question to you: Was the president aware of Israel striking that gas field? Did he approve it?
Answer: Well, I’ll say two things. Fact number one, Israel acted alone against the Asaluyeh gas compound. Fact number two, President Trump asked us to hold off on future attacks, and we’re holding off.
The question was: Was Trump aware?
Answer: Israel acted alone.
A bit later: “Does anyone really think someone can tell President Trump what to do? Come on. President Trump always makes his decisions on what is good for America.”
Trump said he had admonished Netanyahu for the strike on South Pars. “I told him, ‘don’t do that’ — and he won’t do that,” he added. “We’re independent, but get along great. It’s co-ordinated, but on occasion he’ll do something and if I don’t like it — [I tell him] we’re not doing that and so we’re not doing that anymore.” .”
Hegseth backed claim that Trump “knew nothing” about gas field attack.
US-Israel strikes have destroyed Iran’s ability to enrich uranium, Benjamin Netanyahu says Israeli prime minister suggests war will end ‘a lot faster than people think’
Israeli Prime Minister Benjamin Netanyahu said joint US-Israel strikes had destroyed Iran’s ability to enrich uranium and to produce ballistic missiles, and that he saw “this war ending a lot faster than people think”.
Netanyahu rejected the notion of an open-ended military campaign against Iran, telling a press conference on Thursday evening that the objectives he had set were achievable. (…)
He said the war “will take as long as necessary” for Israel’s goals to be achieved: the decimation of Iran’s existing missile and nuclear stockpiles, and creating the conditions for the potential fall of the Islamic republic.
Saudi Arabia Sees a Spike to $180 Oil if Energy Shock Persists Past April Prices at such a level could trigger a recession or consumer changes that crush demand
The base case, several oil officials in the Gulf’s biggest producer said, is that prices could soar past $180 a barrel if the disruptions persist until late April.
While that would sound like a bonanza for a kingdom still heavily leveraged to oil revenue, it is deeply concerning. Prices that high could push consumers into habits that slash their oil use—potentially for the long term—or trigger a recession that also hurts demand. (…)
Saudi Arabian light crude is already being sold to Asian buyers via its Red Sea port for around $125 a barrel. As extra oil in storage—some of which was shipped out of the Gulf ahead of the war—is used up, physical shortages will bite more deeply next week, causing prices to close in on $138 to $140, the officials said.
By the second week of April, with no easing of the supply disruptions and the Strait of Hormuz remaining closed, the Saudi officials said they expected prices could hit $150 before stepping up to $165 and $180 in the weeks ahead. (…)
“The market isn’t acting like this is an end-of-March thing any more,” said Rebecca Babin, a senior energy trader for CIBC Private Wealth, referring to an ending for the war. “I don’t think $150 is out of the question in another month…You start talking about June, I’ll give you $180.” (…)
An adviser working with Saudi Aramco said the company is weighing a scenario in which the rapidly rising cost of oil imports in Europe, Japan and Korea puts downward pressure on their currencies, raising their effective cost of energy, driving inflation and interest rates up, and eventually slowing their economies and demand. (…)
- Record Diesel-Price Surge Hits U.S. Truckers, Retailers and Manufacturers Average on-highway price for diesel jumps 25% in a week, as Mideast disruptions also lift air and sea shipping rates
(…) Most large trucking companies will pass the added costs on to American stores and factories as fuel surcharges. “It is a contractually agreed-upon item and they know this is out of anyone’s immediate control,” said Bob Knowles, who oversees transportation for NFI Industries. (…)
By March 6, the cost of European jet fuel had risen 80%, according to Clarksons Research. Analysts at TD Cowen said in a recent note that they expect importers and exporters to bear the brunt of conflict-related shipping delays and cost increases in the form of fees and surcharges. (…)
Freight specialists say air and ocean transportation costs are rising fastest in the Gulf region, and are expected to be felt more broadly over the coming weeks. Niall van de Wouw, chief airfreight officer for Oslo-based transportation-data firm Xeneta, said short-term rates on air routes that rely on Middle East transit hubs could double or triple.
The conflict has partially closed airports in Doha, Dubai and Abu Dhabi that account for a quarter of China-to-Europe airfreight and almost all of India’s air exports, said Vishal Sharma, group chief commercial officer for Denmark-based DSV, the world’s largest freight forwarder. (…)
Carriers have also paused plans to return to ocean routes through the Suez Canal because of fears of attacks from Houthi militants in Yemen. They are instead sending containerships on voyages around Africa that take longer and burn more fuel. (…)
Strang said bunker fuel surcharges today average about $320 to $350 per 40-foot container, a roughly 10% to 17% addition to the average cost to ship a box from Asia to the U.S.
- Most crude shipments through the Strait of Hormuz are bound for Asia, with China, India, Japan, and South Korea as the principal buyers. In total, Asia takes about 11.2 mbd of crude and 1.4 mbd of refined products that transit the Strait.
As a result, the immediate physical shortfall is concentrated in Asian markets, where reliance on Gulf barrels is greatest. (…)
Timing effects further reinforce this divergence. A typical voyage from the GCC to Asia takes approximately 10-15 days, while shipments to Europe require closer to 25-30 days via the Suez Canal, or even 35-45 days if rerouted around the Cape of Good Hope.
As a result, the impact of disrupted Gulf flows will hit Asian markets earlier and more acutely, whereas Atlantic basin benchmarks such as Brent and WTI will remain cushioned for longer by inventory overhangs and slower supply adjustments.
By mid-March, multiple sectors in Asia had shifted into a defensive footing as energy prices spiked and supplies tightened. The retreat in refined product flows is already visible: shipments from the region’s major exporters are down about 30% over the past 10 days versus the five‑month baseline, with preliminary data for the last week pointing to an even steeper 35% drop.
The pullback is sharpest in jet fuel (down more than 40%), followed by gasoline (down more than 30%) and diesel (down more than 20%). Diesel has emerged as the region’s immediate choke point, with surging prices slowing both travel and freight.
Governments are responding with a mix of demand management and emergency measures. Bangladesh brought forward the Eid-al-Fitr holiday and allowed universities to close early to save fuel. The Philippines and Sri Lanka instituted four‑day workweeks to curb diesel use and stretch dwindling stocks. Pakistan closed schools and shifted universities online. Officials in Thailand and Vietnam have been urged to use stairs, work from home, and limit travel, while Myanmar introduced alternating driving days to reduce road fuel demand.
In parallel, authorities are intervening directly into fuel markets to stabilize fuel prices. As anyone who has looked at booking flights recently can attest to, the airline industry is particularly exposed. And if you’re flying anywhere in Asia you might be up the creek: As jet fuel approaches $200/bbl, carriers are shifting from cost management to outright service withdrawal, with many routes rendered uneconomic.
As of March 18, several Asian airlines, including Qantas, Air India, Cathay Pacific, and IndiGo, have introduced phased fuel surcharges. Long-haul Air India tickets from Asia to Europe or North America now carry a $125-200 surcharge per passenger, with an additional $4.30 on domestic flights — effectively pricing out many leisure travelers for the upcoming summer season. Scandinavian Airlines (SAS) and Air New Zealand were among the first carriers to cancel or reduce flights due to soaring jet fuel prices.
JPMorgan says that outright shortages are already beginning to bite, and in some cases forcing sizeable production cuts: In many regions, demand isn’t being reduced by choice but by the physical absence of inputs.
Asian and European steam crackers rely on naphtha and LPG from the Persian Gulf, and with those feedstocks constrained, shutdowns and curtailments are occurring immediately.
Asia is the most exposed, sourcing more than 50% of its naphtha from the Middle East. Japan offers a clear example. With over half of its naphtha imported — roughly two-thirds from the Middle East — petrochemical producers are trimming output: Mitsubishi Chemical and Mitsui Chemicals have reduced ethylene runs, while Sumitomo Chemical may delay restarting Keiyo Ethylene and expects reduced rates even after restart.
South Korea is also seeing pressure build across the sector. YNCC — one of the region’s largest ethylene producers — has declared force majeure and is running its cracker at significantly reduced rates. Both Lotte Chemical and LG Chem have warned customers that they may follow, and the government has temporarily designated naphtha an “economic security item” to manage dwindling stocks.
The strain extends across Greater China and Southeast Asia. In China, Sinopec has cut March refinery runs by about 10% to conserve crude stocks. A Shell — CNOOC joint venture has shut its Huizhou ethylene cracker and told customers that polyethylene shipments are suspended indefinitely effective March 5, while Wanhua Chemical has declared force majeure for Middle Eastern customers amid severe LPG feedstock disruptions.
In Indonesia, Chandra Asri is operating at reduced rates and has declared force majeure following a sudden halt in feedstock arrivals. Meanwhile, in Taiwan, Formosa Plastics Group’s Taiwan Petrochemical declared force majeure on March 10 and indicated that, if shortages worsen, volumes will be allocated based on actual availability.
India suspended shipments of LPG to commercial operators to prioritize supplies for households, leading to worries from hotels and restaurants that they may be forced to close.
So what does this mean for oil demand, and by extension economic growth? Nothing good. Oil demand is, on average, highly inelastic in the short run because most end uses have few immediate substitutes — factory boilers rely on fuel oil, aircraft require jet fuel, and most cars still run on gasoline. Our estimate of the short‑run price elasticity of global oil demand is −0.024, implying that a roughly 40% price increase above 12‑month highs is needed to reduce total consumption by 1%.
The response, however, varies materially by product. Naphtha is most sensitive because petrochemical plants can partially substitute ethane in cracking operations. Jet fuel is also relatively responsive, as airlines can cancel lightly loaded flights when fuel costs spike.
By contrast, fuel oil is least elastic given its role in essential services like home heating, marine transport, and power generation.
Taken together, these elasticities imply that if Brent averages $100 in March, the price effect alone would trim global demand by about 1 mbd in April — before accounting for additional losses from grounded flights in the Middle East and outright physical shortages.
Unfortunately, Alphaville suspects that unless the Straits are reopened soon then whatever happens in Asia probably won’t stay in Asia.
And even if peace somehow breaks out, this episode could have a long tail. As the FT reported earlier today: Iran’s most potent weapon has proved to be its ability to in effect close the Strait of Hormuz, through which about one-fifth of the world’s oil and gas normally passes. While Iran had previously threatened to close the strait, the western official said, “they never knew [they could] until they tried it”. “Now they know, and it’s pretty effective,” the official said.
“The risk is they will keep holding the world hostage.”
- China cracks down on fuel and fertiliser exports Beijing is trying to preserve its own stockpiles by limiting sales
China is throttling exports of jet fuel, diesel and fertilisers, adding to fears in some of Asia’s biggest resource, manufacturing and agricultural nations that supplies could run short because of the war in the Middle East.
The National Development and Reform Commission, China’s top economic planner, has in recent days told fertiliser exporters to halt overseas shipments of some product lines, according to industry insiders, diplomats and analysts.
This follows NDRC’s instructions earlier this month to large state-backed oil refiners to stop overseas shipments of jet fuel, diesel and kerosene.
China is the world’s second-largest exporter of fertiliser, after Russia, and the sixth-largest exporter of jet fuel, according to International Trade Centre data. It is trying to preserve energy and food reserves and protect the domestic market, analysts say.
- The International Energy Agency has advised households, businesses and governments to adopt measures such as working from home and carpooling to curb fuel demand and ease pressure from soaring oil prices.
The IEA’s recommendations also include slower highway speeds, greater use of public transport and car sharing, cutting nonessential air travel and encouraging electric cooking, among other measures.
Gulf countries have cut oil production by at least 10 million barrels a day, and without a rapid resumption of shipping flows, supply losses are set to increase, the IEA said. “The volume of fuel supply offline now is higher than the supply loss during the oil shock of 1973 that led to the IEA’s creation and any disruption since then.”
-
Iranian strikes on liquefied-natural-gas facilities at Qatar’s Ras Laffan Industrial City reduced the country’s export capacity by 17% and will take three to five years to repair, the country’s energy minister said, as strikes and interceptions continued in the region.
-
Reopening the strait:
“I think it will take weeks to reach a point where there can be safe operations in the strait,” he said. “Even then, a lot of the Iranian assets will survive.”
Houthi militants in Yemen, who are aligned with Iran, waged a two-month campaign last year with missiles, drones and unmanned boats against international shipping that parallels Iran’s closure of the strait. The U.S. struck more than 1,000 targets in Yemen, but never succeeded in halting Houthi attacks fully until the two sides declared a truce in May.
-
Trump reportedly considering plans to occupy or blockade Iran’s Kharg Island
Such an operation would only be launched after the U.S. military further degrades Iran’s military capacity around the Strait of Hormuz. “We need about a month to weaken the Iranians more with strikes, take the island and then get them by the balls and use it for negotiations,” said a source with knowledge of White House thinking.
We had not heard from Scott Bessent for a while.
- Treasury Secretary Scott Bessent said the U.S. may lift sanctions from Iranian oil at sea and release more oil from its strategic reserves to ease pressure on prices. “In essence, we’d be using the Iranian barrels against the Iranians to keep the price down for the next 10 or 14 days, as we continue this campaign.”
- “To put it mildly, this is bananas,” Blackstone Compliance Services’ David Tannenbaum told the BBC. “Essentially, we’re allowing Iran to sell oil, which could then be used to fund the war effort.”
Bessent also said, perhaps desperately trying to keep oil prices (and inflation, and interest rates) down:
“The largest coordinated SPR release in history, 400 million barrels, was approved last week,” he said. “The U.S. could unilaterally do another SPR release to keep the price down.”
Hmmm…:
Unfortunately, there was only 155mn barrels of sweet oil and 261mn barrels of sour oil as of March 13, according to the SRP’s own website. That’s because president Joe Biden ordered the release of 180mn barrels in 2022 after Russia’s invasion of Ukraine caused energy markets to go haywire, and the US has since been slow to replenish it. The Trump administration has already said it will release 172mn barrels as part of a wider, record-breaking 400mn international release. But, once complete, this will bring the SPR’s holdings down to 244mn barrels — and the government is actually barred by law from drawing down inventories if there’s less than 252mn barrels in the salt caverns.
The US could of course declare an emergency — though that’s supposed to mean a real crisis of acute energy shortages, not pricier gas ahead of mid-term elections — or get Congress to change the law. But there’s another hard limit that is a lot harder to bully into submission: physics.
The SPR’s salt cavern system wasn’t designed to operate like an everlasting oil piggy-bank you can easily draw down and fill up whenever you want. As Bloomberg has previously reported: The Gulf Coast salt caverns that comprise the 70s-era reserve were built with a 25-year life span in mind. They were designed for just five drawdowns and refills, said William “Hoot” Gibson, the reserve’s former project manager. The more the system is used, the higher the risk the salt caverns will dissolve.
By Alphaville’s count, this is already the ninth drawdown (emergency or otherwise) since the SPR’s inception in 1977. There’s therefore apparently a minimum level of oil that must be kept in the salt caverns to prevent a catastrophic structural damage. We haven’t been able to find out definitively what this level is (even after scanning some of the recent SPR reports to Congress), but JPMorgan’s energy analysts said last week that it was about 150 million barrels, beyond which dangerous things could happen. . . .
The SPR has a practical operational floor near 150–160 mb that must remain in place to preserve cavern stability and maintain operational flexibility, including a small portion of “roof oil” that cannot be withdrawn. So sure, yes, maybe the US government can release more oil from the SPR, beyond the 172mn barrels it has already announced. But not as much as it has already promised, and heading towards the lower operational limit would probably spark fear more than anything else. Desperation tends to do that. (FT)
Economists Don’t See a Recession Unless Oil Hits $138—and Stays There for Weeks In survey, an average of economists projects the Iran war boosting inflation but probably not hurting growth
(…) Economists put the probability of a recession in the next 12 months at 32%, up modestly from 27% in January. Asked how high crude oil would need to climb to tip the recession probability above 50%, economists gave a range of responses: from $90 a barrel to $200, with an average of $138. Asked how long oil prices would need to be at an elevated level, they said from four weeks to 55 weeks, with an average duration of 14 weeks. (…)
***
In yesterday’s Daily Edge, I noted that Powell and the FOMC were rather sanguine about inflation, right after February’s PPI came out very bad. The FOMC’s SEP sees core inflation slowing from 2.9% in 2025 to 2.7% in 2026.
Matt Klein agrees with me:
This is a failure of analysis. According to Jerome Powell’s latest press conference, Fed officials believe that their policy has been “restrictive” (it has not), that inflation would already be at or close to 2% if not for tariffs (it would not), and that “the labor market is clearly not a source of inflationary pressures” (it is). The latest data, which run through February, make it clear that the inflation situation was continuing to get worse before the current conflict. (…)
Perhaps the most striking thing about Powell’s Wednesday press conference was the repeated—and wrong—insistence that excessive inflation was mostly about rising goods prices, which in turn were mostly about tariffs:
Inflation has eased significantly from its highs in mid-2022 but remains somewhat elevated relative to our 2 percent longer-run goal…These elevated readings largely reflect inflation in the goods sector, which has been boosted by the effects of tariffs.
To be fair, goods inflation was getting worse before the Iran conflict, and in some significant categories was worse than in the 2021H2-2022H1 price spike. In the years immediately preceding the pandemic, consumer goods prices regularly fell about 0.5%-1% each year. In 2024, those prices were flat. As of the eve of the war with Iran, consumer goods prices were rising by about 2% a year—and the pace was accelerating.
The picture looks worse when focusing on goods purchased by businesses, either as inputs or capital equipment.
Prices of “components for manufacturing” rose by 0.9% in January and by 1.1% in February on a seasonally-adjusted basis. The February increase was larger than in every month of the post-pandemic inflation except for January 2022. Capital equipment prices are rising about 5% annualized, up from about 3% in 2023-2024 and about 1% in the years before the pandemic. Prices of “supplies to manufacturing industries” have been accelerating rapidly, with the one-month increase in February the largest since April 2021.
Tariffs are not the only explanation for this. One of the biggest categories within “supplies to manufacturing industries” is “printed circuit assemblies, loaded boards, modules and consumer external modems”, which have mostly been excluded from tariffs because of their importance to the datacenter buildout. Those prices rose by 48% (!!) between January and February. Even if that were a typo, prices rose by 26% between January 2025 and January 2026, which is unprecedented in the history of the data going back to the early 1980s.
While all of this is both significant and unwelcome, it pales in importance to what has been happening with services prices.
Many of the forces affecting the prices of goods are relatively insensitve to changes in U.S. domestic monetary and financial conditions. The same cannot be said for services, which represent the bulk of economic activity, and which, by themselves, should be making Fed officials worry that their 2% inflation target is of reach.
Go back to Matt’s first chart and look at the red lines, Powell’s Supercore inflation.