Comparison of the Iran-U.S. War and Historical Conflicts: Do stocks, bonds, and oil trends resemble those during the Gulf War?

Caixin News, March 27 (Editor: Xiaoxiang) The risks currently facing the oil market are undoubtedly at an all-time high.

While the Trump administration in the United States seeks to negotiate peace with Iran, the White House is still mobilizing more troops in the Middle East.

According to U.S. Department of Defense officials, the Pentagon is considering deploying up to 10,000 ground troops to the Middle East, including infantry and armored vehicles, to provide more military options. These troops will enhance the military capabilities of approximately 5,000 Marines and thousands of paratroopers already in the region, with speculation that they may operate near Iran and its energy hub, Khark Island, in the future.

Meanwhile, traders are warning that for every day the conflict continues, the energy shock will worsen and push the global economy, as well as stocks and bonds, into greater danger.

As this conflict, which began on February 28, approaches its first month, let’s briefly review how it compares to historical geopolitical conflicts:

The largest oil supply crisis in history

The International Energy Agency stated earlier this month that the closure of the Strait of Hormuz has caused the most severe supply disruption in the history of the global oil market.

(From left to right: Suez Canal War, Arab Oil Embargo, Iranian Revolution, Gulf War, Iran War) The Strait of Hormuz is a vital passageway that fulfills approximately 20% of the global oil consumption of 100 million barrels per day, and oil tanker transport through this strait has drastically reduced to almost none. Although Saudi Arabia has diverted some supplies to other export terminals through existing pipelines, analysts, including Rapidan Energy Group, indicate that there are still 10 million barrels or more of oil supply being hindered daily in the Middle East.

Iran’s threats against oil tankers and the shutdown of major production facilities in oil-producing countries in the Middle East could mean that the impact on oil and gas markets will far exceed the end of the conflict. Unlike previous shocks that lasted for months or longer, during the actual blockade of the Strait of Hormuz, Saudi Arabia and other major crude oil exporters have very limited ability to increase idle production capacity.

Oil price increase comparison

Since the beginning of the year, global benchmark Brent crude futures prices have surged about 80%, even though earlier reports regarding U.S.-Iran negotiations had once triggered significant sell-offs. As shown in the chart below, since the outbreak of conflict at the end of last month, with drones and missiles frequently flying over the Strait of Hormuz, the current surge in oil prices is most similar to the period following the Gulf War in 1990.

The Gulf War was a regional conflict launched against Iraq by a U.S.-led coalition of 34 countries from August 2, 1990, to February 28, 1991. The main combatants included coalition forces and Iraq, with approximately 660,000 and 860,000 troops deployed, respectively.

At the same time, the current increase in oil prices has already far exceeded that of the 2022 Russia-Ukraine conflict. Of course, prior to the outbreak of the Russia-Ukraine conflict in 2022, the global economy was experiencing a strong recovery from the pandemic—when oil prices were much higher than the levels seen at the beginning of this year. However, it is important to note that even though the anticipated disruptions in oil supply that year largely did not occur, oil prices remained elevated for several months.

U.S. stock performance comparison

This Thursday, the S&P 500 index and the Nasdaq index recorded their largest single-day declines since the start of the conflict between the U.S. and Israel on February 28. Looking at the stock market performance since the outbreak of this conflict, the sell-off has generally followed the negative reactions seen after previous geopolitical shocks.

Before the outbreak of this conflict, the S&P 500 index had already experienced a pullback due to concerns that artificial intelligence could disrupt industries such as software and financial services. Investors have indicated that since the conflict began, the overvaluation of the U.S. stock market has further exacerbated some volatility.

Overall, compared to the current pressures on the U.S. stock market, the geopolitical conflict that had a greater impact was still the Gulf War of the 1990s. In contrast, at the current stage of the Russia-Ukraine conflict, the S&P 500 index has remained roughly even with the level at the start of the conflict. Of course, considering that the geopolitical shock at that time exacerbated inflation, ultimately leading to a decline in corporate profits and an increase in borrowing costs, the S&P 500 index still fell by 21% in the first half of 2022.

U.S. Treasury sell-off comparison

As shown in the chart below, the increase in the yield of the 10-year U.S. Treasury bonds since the outbreak of the U.S.-Iran war is roughly comparable to the corresponding phases of the Russia-Ukraine conflict and the Gulf War.

One difference, of course, is that prior to the 2022 Russia-Ukraine conflict, U.S. Treasury yields were still low because the Federal Reserve was trying to revive the economy after the pandemic. In this instance, the uncertainty regarding interest rates has pushed yields to relatively high levels. Nevertheless, the intensity of the sell-off in U.S. Treasuries remains unabated, with the 10-year U.S. Treasury yield climbing to one of its highest levels since July of last year.

After Iraq invaded Kuwait in 1990, the speed of the rise in the 10-year U.S. Treasury yield was even faster at one point, when the U.S.'s dependence on energy was much greater than it is now.

Strategic oil reserve sell-off is comparable to the Russia-Ukraine conflict

The United States has committed a significant share of the largest-ever release of crude oil reserves to members of the International Energy Agency—approximately 172 million barrels of oil. The oil being released is stored in a network of salt caverns near the U.S. Gulf Coast, which is slightly smaller than the emergency release authorized by former President Biden during the 2022 Russia-Ukraine conflict.

From a historical perspective, the scales of both releases are considerable, indicating that the White House is becoming increasingly proactive in utilizing strategic reserves to address price shocks or economic threats.