Not even China can keep the Strait open/Bonds no safe haven/Some earnings/LSTA breaks
Whenever there was a confrontation with Iran the question was always, ‘whatever if the Strait of Hormuz closes?’ It was always the worst nightmare scenario but never seemed to come to pass, especially because China gets about 45% of their crude oil needs from the Middle East with 11% from Iran in particular and they had their economic say to Iran. Well, here we now are, it seems. Iranian officials said they are closing it, via bombing threats, even though US Central Command said that is not the case. Either way, tanker prices have skyrocketed, insurance is only available at much higher prices, if one can get it, and we know the delivery of both crude and LNG is about to fall dramatically.
According to a Reuters story, the cost of shipping 2 million barrels of oil from the Middle East to China in a VLCC (very large crude carrier) rose to about $425,000 per day, a record high. That is double the price seen Friday. And, “Atlantic rates rose to $61,500 per day on Monday, up 43%, or $18,750, from Friday, according to Spark Commodities, a pricing assessment agency for LNG shipping. Pacific rates rose to $41,000 per day, up 45%, or $12,750, from Friday.”
Markets seemed to have gotten off easy yesterday and even after the closing of the Strait story came out yesterday afternoon, it didn’t really respond so what we see on the screens this morning is a definite delayed reaction.
Back to my point earlier that China gets almost half of its crude shipments via the Strait, they are already vocal on allowing safe travel of tanker shipments and according to Bloomberg, have “been pressuring Iranian officials behind the scenes, urging them to avoid action that would disrupt Qatari gas exports or other energy shipments making their way through the Strait. So far, at least four commercial ships have reportedly been damaged.” A spokeswoman at the Chinese Foreign Ministry said today “China urges all parties to immediately cease military operations, avoid escalating tensions and safeguard the safety of navigation in the Strait of Hormuz.” And every other Mideast country, particularly Qatar and with its LNG exports, are pressuring Iran in the same fashion.
US Treasuries are no safety trade and neither are any global sovereign bonds with yields spiking around the world because of the inflationary pressure from the spike in energy costs. The US dollar is rallying again and is the safety trade because Europe and most of Asia in particular import most of their energy needs. So, maybe less safety and more energy price protected is the US, especially with natural gas where the US is a dominant LNG producer and exporter.
The 2 yr inflation breakeven in the TIPS market jumped 9 bps yesterday and by another 5 bps today to 2.95%, after getting as low as 2.67% two weeks ago, and that is the highest since last April. The 5 yr breakeven was up 6 yesterday and another 3 bps today to 2.54%, a one month high. The 10 yr breakeven was up a more modest 4 bps yesterday and 1.5 bps today to 2.31% as eventually that Strait will reopen.
