Brent crude at around $100 is a pricing error! Iran's "energy retaliation" escalation combined with the US PPI soaring.

How does the US PPI explosion correlate with the surge in oil prices?

After Israel’s strike on Iran’s South Pars gas field, Iran has sent out strong signals of retaliation. Iran’s semi-official media Tasnim News Agency reported that several energy facilities in the Persian Gulf have become “direct and legitimate targets of attack” and may face strikes in the coming hours. The named targets include Qatar’s Ras Laffan refinery, the Mesaieed petrochemical complex, Saudi Arabia’s Samref refinery, the Jubail petrochemical complex, and the UAE’s Al Hosn gas field.

The nature of the war is evolving from localized military conflict to “energy infrastructure confrontation.”

The most concerning scenario for the market has occurred: the war has begun to impact oil and gas production, refining, and transportation nodes. Once the Gulf energy supply chain continues to be disrupted, the rise in oil prices is unlikely to be merely a short-term pulse, but could develop into a more sustained supply shock. As a result, Brent crude prices have risen over 5%, surpassing $109 per barrel. The evacuation of related facilities by Saudi Aramco also indicates that the risks are being taken seriously at the industrial level.

Iran has released very hardline signals, clearly stating that it will not concede and has listed several energy facilities in the Persian Gulf as “direct and legitimate targets of attack.”

What is even more alarming is that the escalation is no longer just isolated friction, but is moving towards a “mutually destructive” direction. High-ranking Iranian officials have been attacked consecutively, Gulf energy facilities have been publicly included on the strike list, and some energy projects involving American companies have also been exposed to risk. After the Al Shah gas field in the UAE was attacked by a drone and caught fire, ADNOC and Western oil companies have already shut down related operations.

Crude oil supply has begun to shrink significantly, and the current pricing of Brent crude in the futures market around $100 is entirely a result of the U.S. national team’s interventions and high-ranking officials frequently releasing false messages to suppress prices; the true market price has already surged.

Against this backdrop, the U.S. government has taken urgent buffering measures. Trump announced a temporary exemption from certain restrictions of the Jones Act, allowing foreign-flagged vessels to undertake some transportation tasks between U.S. ports for the next 60 days in an attempt to lower logistics costs for oil, gas, and other goods within the U.S. This action itself indicates that the upward pressure on energy prices has begun to transmit to the domestic U.S. market, and the policy level is preparing for higher transportation costs and potential shortages.

Meanwhile, the latest inflation data from the U.S. confirms another issue: inflationary pressure has not truly disappeared, and the market is facing stagflation trading.

In February, the U.S. PPI rose 0.7% month-on-month, significantly higher than expected, with core PPI increasing by 0.5%. This set of data appeared before the full-blown war in Iran began to push energy prices higher, indicating that the upstream price pressure in the U.S. was already strong. Rising service costs have been the main driver, with prices for traveler accommodations, wholesale food, investment services, etc., all on the rise, and food prices have recorded one of the largest increases since mid-2021. In other words, even without subsequent oil price shocks, the inflation stickiness at the supply chain level in the U.S. has already started to rise.

This is the most challenging aspect for the current market to handle.

On one side is the escalating conflict in the Middle East, soaring oil and gas prices, and a continuing supply shock; on the other side is the U.S. PPI exceeding expectations, indicating that the inflation background is not clean. If energy prices continue to rise, U.S. inflation is likely to face a new round of imported pressure, while economic growth will be dragged down by higher energy costs and weaker consumer confidence.

This is the fundamental logic behind the rising stagflation trading: inflation is rising again, growth is under pressure, but the policy space is becoming increasingly narrow.

The market was originally waiting for the Federal Reserve to release more easing signals in the future, but now it seems that at least in the short term, this expectation will be significantly suppressed. The surge in oil prices combined with rising upstream inflation will put the Federal Reserve in a more passive position between controlling inflation and stabilizing growth. Interest rates cannot be easily lowered, and the economy is difficult to avoid harm; in this context, investments this year will be very challenging, and readers should comprehensively lower their expectations for this year’s returns.

Thank you for reading this far. If you found it insightful, feel free to like, share, and follow.

If you think this article is valuable, please share it with your colleagues, clients, or team, so we can collectively understand the “rhythm” and “direction” of China’s economic policy.

— END —