Today's number: 14. That's how many months Kristi Noem served as the Secretary of the Department of Homeland Security. That makes her tenure the second shortest in American history. However, the good news is she lasted longer than her dog.
Welcome to Prof G Markets. I'm Ed Elson. It is March 10th. Let's check in on yesterday's market vitals. The major indices rode out a volatile session with the S&P 500 falling as much as 1.5%. By close, however, the major indices were back in positive territory after Trump said the Iran war was, quote, 'very complete, pretty much.' Oil prices moderated after surging over the weekend. We'll talk about that shortly. Meanwhile, the dollar climbed and Bitcoin topped $69,000.
Okay, what else is happening? The global energy market is facing its most severe shock since the 1970s. The Strait of Hormuz closed for the first time in recorded history, pushing the price of oil above $100 a barrel on Sunday. It spiked as high as $119 before crashing back down to $85 a barrel on Monday as the G7 signaled it is ready to release strategic reserves. Meanwhile, Qatar halted 20% of the global liquid natural gas supply after Iran fired drones at a Qatari facility. Okay, here to help us break down what is happening in the Gulf and what it means for energy and for oil, we are speaking with Mohammed Sergie, editor at Semaphore Gulf. Mohammed, thank you for joining us. So much has happened in just a couple of days. This story is changing literally by the hour. I mean, oil skyrocketing and then coming way back down. What do you make of what has happened over the past couple of days, and what do you make of prices in reaction to what's happened?
Yeah, thank you for having me. This has been just an incredible turn of events, I would say, for the Gulf. And all the eyes went towards Hormuz, and that's a choke point for the natural gas that comes out of Qatar, obviously, and that had a huge spike in gas prices in Asia and in Europe. But even more importantly, it's the choke point for about 30%, if not a bit more, of the traded oil in the world. What comes out from there? It's all of the oil from Iraq, all of the oil from Kuwait, and a significant portion from Saudi Arabia and the UAE. The idea here is that we couldn't see any more ships going through over the weekend. This one was the unthinkable — the closing of Hormuz. And I think that's why we saw this huge swing up and down. But then when people started looking at, okay, so what is actually happening to supply? Is the market well supplied? And how much can go through the pipelines that bypass Hormuz? There's a pipeline that goes from the east to west in Saudi Arabia, usually has capacity, I would say, between 5 million, could go up to 7 million barrels a day. So they could potentially move most of the oil that they need to the Red Sea. And there's another pipeline that goes through the UAE down to the Gulf of Oman. And I think once you start factoring that in, the supply scenario would change a little bit, and that's potentially one of the reasons why the prices came back down so quickly.
Help me make sense of what exactly markets are reacting to, because there seem to be so many different stories here. One of which is Israel striking many of the oil facilities over the weekend in Iran. We all saw that giant cloud of smoke in Tehran that was going viral and seemed to be kind of the image of this war. There's also the fact that they announced the new supreme leader, who is going to be Khamenei's son. There's the fact that Trump was then saying that he had opinions on how this regime change would work. So that seemed to be a signal, oh yeah, they're going after a regime change. Then they kind of pulled back on that. There's the fact that the Strait of Hormuz was closed. And then there's also the factors that seem to be bringing prices down, which is that I guess G7 nations said, 'Oh, no, we have our own oil anyway, so it's fine.' I mean, the price action is so temperamental, and it's hard to understand exactly what traders and investors are actually reacting to here, and therefore which things are actually important for people like us who just live in the US, who probably aren't going to get shot down in this war but will be affected on the consumer side. So my question being: what exactly have markets been reacting to?
I think it's more the first part of the factors that you were mentioning. So if this war is extended, if we see no off-ramp for the US and Israel, and it has to continue, and therefore that choke point stays closed, at some point we're going to see a supply crunch, and that's really the major fear. Now, the world is oversupplied with oil — a major theme really over the last couple of years looking forward. So if you look at IEA reports, they had it at, you know, 4 million barrels a day. Obviously, OPEC for years has been constraining its supply, and they rolled back some, they've reversed some of their cuts over the last year or so, year and a half or so, because they felt that demand was growing, particularly in India and other Asian markets. But if you take out 20% of the oil, then obviously that's a huge supply shock. That's the reaction. So it's a fear that this thing is going to last a long time. And now we're seeing messages even, you know, just before coming on here, President Trump had an interview, I believe, with CBS where he's saying the major operations or the large part of the war, the war is over with Iran. Is there an end in sight? And he also, I think, he mentioned that some ships are starting to come through Hormuz — VLCCs, they're called, the biggest tankers. If they come through, you can basically make a case that there's going to be at least enough supply to meet demand in the market, and hence prices should not be rising at such a rapid pace. But that initial fear, that trigger of fear — that's exactly what it is. The traders shot everything up.
Well, he wrote on Truth Social, he said, quote, 'Short-term oil prices, which will drop rapidly when the destruction of the Iran nuclear threat is over, is a very small price to pay for USA and world safety and peace. Only fools would think differently.' I mean, I think the big question here is like, what will this actually do to the price of gasoline in America? I mean, we've spoken with experts who've said that, you know, basically like a $10 increase in the price of oil is going to increase prices at the pump per gallon by around 25 cents. But then the question becomes like, well, what happens if it goes up by $50 one day, down $50 the next day, and keeps on swinging back and forth as we are literally seeing right now? I mean, what can you say about what the price of oil will actually do to consumers in America right now?
Yeah, it's, you know, it's a tough question because, you know, it doesn't necessarily — you know, oil goes up to 110 and all of a sudden they go out and change all the signs and they're like, you know, here you go, you were at 2.50 or 2.85 and now you're at 4.50, right? So there's a lag in some of this. I think there's a certain averaging that happens, and there's a moving average over a couple of days that they price into the pump because it's a refined product. This is obviously no huge relief to people who are really worried about, you know, their pocketbook and how much their main factors in life and gas prices are going to go up. But it's like a question of what is the real price of oil and what should it be, and should it always be stable at like $75 to $80 a barrel where that's a fair price, or does it change over time? But then how does it affect inflation? It's inflationary — there's no question about that because it increases the cost and the factors in every single input of the economy.
Yeah. Just before we end here, a thought on how you do your job as a reporter, as a journalist covering this stuff. Something that I have been struggling with. I can't tell if the markets right now are proactive or reactive. I can't tell if I'm looking at the price and oil traders are saying this is a reflection of what we expect to happen in the future, or if they're completely just — something changed, someone got shot, an oil facility got blown up, and now the price of oil is different. And so my question to you as a journalist who covers this stuff: are you looking to the price of oil as an indication of what is to come, or do you look at the price of oil and does it simply tell you things that you've already known, things that you've been covering as a journalist on the ground when it comes to what is actually unfolding in this war and in the conflict?
Probably a mix of both, right? So it has been that geopolitical risk premium has been muted for a long time. So there have been certain things that have happened in the Gulf, and you know, between the June war expectations where that oil should have increased, should have popped higher, and even the first few days of the strikes in this last week or so, we haven't seen — you know, of course oil did jump, but it didn't jump at the same level. It's that closing that I think a psychological switch happened with Hormuz, attacks on oil facilities, attacks on processing plants. And there was always this understanding, in a way, between all of the Gulf countries that we're not going to hit critical infrastructure. The attacks, the retaliation from the Iranian regime would be against perhaps US assets, military assets, that sort of thing. Very quickly we saw that there was an attack on Ras Laffan, which is the LNG complex in Qatar. There was another one on a processing plant in Bahrain, on a refinery, that escalated it. And then, you know, as you mentioned earlier, we believe it's an Israeli attack on a refinery in Tehran. So when you start hitting the actual nuts and bolts of export of crude and product from that region, I think it rightfully so changed their trigger. There's still question — and the Qatari energy minister said over, I think, on Thursday or Friday, that he believes that oil can go up to $150 a barrel if this continues for a long time. There are two bypass pipelines that I mentioned earlier — from the east-west line in Saudi Arabia and the one that goes basically north-south through the UAE. If those are hit as well, then I could see oil going way back up again because people would say, are they going to be able to get enough oil out to the market? If this all ends in March, there's a lot of analysis out there that says oil stays within this range and is manageable. If it's more prolonged, it changes. There's also the question of the precedent that's been set. So the Arab Gulf states, where a lot, most of the oil comes out from, and where all the really good facilities are in terms of that export, and they have all the ships and all that stuff and the customers in Asia — now that they've been attacked and attacked repeatedly, even if you have a ceasefire or some sort of arrangement with the Iranian regime, but they still maintain their drone capability, their short-range missiles and their mid-range missiles, that they can always play spoiler over any type of negotiation or any type of changes, and that would bake in a premium into the price. So that's kind of longer term: do oil prices remain elevated despite a resolution to this current conflict?
