If you wanted to buy a physical barrel of oil on the global market, it would in no way be commensurate with what the speculated, paper price of that barrel is in the West Texas futures market (which has the price of oil per barrel considerably lower than its real, physical price).
That’s strange enough for most people to wrap their heads around. Where people are really getting confused, though, is how the stock market continues to make impressive gains despite the chaos in essential energy markets (and all the other markets built atop the global energy market) caused by the long-running Strait of Hormuz closure.
Iran flag. Image Credit: Creative Commons.
Despite the obvious long-running closure of the Strait of Hormuz, markets still think the energy shock from that blockade is temporary. Thus, the stock market is running on the fumes of Donald Trump’s presidential statements every week that the war is over, peace deals are coming, and the Americans have defeated the Islamic Republic.
Yet, after 96 days, there is no evidence that these presidential claims are true. Nevertheless, the markets are apparently running on hope rather than reality. However, those days are coming to an end because even the most delusional Wall Street trader sees the limits of Trump’s Pollyanna routine when it comes to the war. In the last forty-eight hours, despite his claims that peace was at hand, Iran has attacked Kuwait with missiles, and Israel continues escalating against Iran’s proxy in Lebanon, Hezbollah.
In fact, the recent OECD forecast, the bleakest major forecast yet produced on the Strait of Hormuz crisis, still includes a baseline scenario in which disruptions ease rather than persist indefinitely. If investors truly believed Hormuz would remain largely unchanged through Christmas, you would likely see a much more aggressive repricing underway.
Buffers
One of the core reasons the market refuses to acknowledge the depth of the energy crisis is the presence of a large Strategic Petroleum Reserve (SPR). The Trump administration has feverishly tapped oil, flooding the market with supplies from America’s SPR to ensure that oil prices remain deflated.
When Trump started tapping into those reserves at the level he did, the SPR was already draining because the previous Biden administration had been tapping it since the Ukraine War of 2022. While it is the second-largest SPR in the world (behind China’s massive SPR of 1.4 billion barrels), it was nowhere near capacity.
Iran F-14 Tomcat Fighter. Image Credit: Creative Commons.
Eventually, the US buffers against higher oil prices will erode. Some experts say that early next month, the US will hit the “bottom” of its buffers. Once that happens, energy prices have no choice but to radically correct.
It’s one thing to live in delusion when you’ve got the key product that drives the economy stored in reserve. Once that bank runs dry, though, the markets must embrace reality.
AI is Overwhelming Everything
A handful of giant tech firms increasingly prop up the S&P 500. Investors are just pouring gobs of money into anything related to artificial intelligence (AI), cloud computing, semiconductors, and datacenter infrastructure. The Guardian notes that tech earnings and AI enthusiasm are offsetting concerns about oil prices and inflation.
So, the real economy may be weakening–and it is–but the economy of bits is exploding. If investors believe that AI profits will explode, they’ll keep bidding up stocks. These investors don’t seem to care whether manufacturing is under pressure everywhere or whether input costs are rising, since disruptions to oil and natural gas flows in the Strait of Hormuz are causing all manner of dislocations across the global real economy.
Headwinds for the World of Bits
Here’s where things start to get interesting, though. One of the vital inputs for the AI and tech sectors is helium. At the start of the Iran War, the vital helium production facility in Qatar was disabled. That prompted the tech sector to look elsewhere to offset the losses. Yet, the notion of a short-term fix is complicated. In the long run, there are plenty of places to acquire other sources of helium.
But the US stock market runs on the near-term.
Many have speculated that we were already in an AI bubble. While I quibble with that assessment, the AI sector can become a bubble overnight if industrial processes are stymied by a lack of inputs such as helium. The helium shortage has already begun to slow semiconductor production. There are further pressures, including shortages of critical minerals like gallium. As the aforementioned shortages complicate semiconductor production, they have a cascading effect on everything dependent on semiconductors.
Notably, datacenters. Setting aside political opposition to data centers in the United States, Bloomberg reports that “more than half the US data centers planned for this year are expected to be delayed.” That’s partly resulting from the slowdowns caused by the Iran War. More interestingly, though, there’s a longer-running problem known as a “transformer crunch” in the United States. Essentially, the ancient US power grid cannot handle the increased load imposed by data centers.
So, the stock market could come crashing back to Earth soon because the AI bubble will pop, taking the stratospheric stock market down with it.
Wall Street Has Repeatedly Been Rewarded for Ignoring Crises
And it’s not as if Wall Street has never deluded itself before–and gotten rewarded for living in a delusion. The market was slow to react to the pandemic; it treated the war in Ukraine as a blip, too. Meanwhile, the market barely registered the Red Sea attacks on global shipping by the Houthis of Yemen. Even the trade wars that the Trump administration enacted barely hit the high-flying market.
This situation exists only because the tech sector is propping everything up.
That, too, will soon return to reality if the data on helium shortages is correct.
The Logic Behind the Markets
Markets, as you just saw, routinely ignore slow-moving crises of the kind the world finds itself in. They ignore that reality until the economic data, which is always backward-looking, becomes undeniable even to the most optimistic investor.
Already, the OECD assesses that disruptions from the Iran War and the Strait of Hormuz blockade will last through 2027. At the same time, though, the markets are not acknowledging that forecast.
It’s just one outlier among a sea of favorable data and assumptions.
Essentially, stocks aren’t tanking because the financial community believes the Iran War energy shock is temporary. They assume that AI earnings will offset economic weakness, too. These investors also think that the US economy is far more resilient to oil shocks than it was in the 1970s.
Whether there’s reason for the exuberant optimism in the market is the trillion-dollar question.
If Hormuz remains severely disrupted through the summer and into the fall, the stock market’s current pricing could prove far too optimistic. And once the stock market fully corrects for this ongoing disaster in the Middle East, we will be in the mother of all recessions.
About the Author: Brandon J. Weichert
Brandon J. Weichert is Senior National Security Editor. He also manages The Weichert Brief on Substack. Weichert hosts “National Security Talk” on Rumble, too. He is the author of four bestselling national security books, the most recent of which is A Disaster of Our Own Making: How the West Lost Ukraine (Encounter Books). Follow him via Twitter/X @WeTheBrandon.
