Let’s Get This Strait: Amid Hormuz Closure, Oil Prices Are the Only Macro Force That Matters

Think of the global economy as a weather system. Most of the time, we track individual clouds, in the form of earnings reports, retail sales, or AI hype. But a Category 5 hurricane has formed in the Strait of Hormuz. And like a massive storm, it is drawing all the moisture (liquidity and attention) out of every other sector and into its own volatile eye.

The effective closure of the Strait, which is a narrow 21-mile chokepoint responsible for 20% of the world’s petroleum and nearly one-third of all seaborne oil, has sent Brent crude (CBK26) surging. That has made a sudden and giant winner out of ETFs like the US Brent Oil ETF (BNO).

A recent scan of the ROAR Score history for BNO indicates that it rallied so quickly, risk went from high to low in under 20 trading days (see 60 days ago and 40 days ago, lower right of this graphic below). And in just 30 days, that low-risk situation vanished, settling into a more neutral risk posture. That’s a classic case of an ETF or stock getting ahead of itself. 

However, if you were holding it from the point at which the low-risk signal fired, you’d have seen the price of BNO surge from $30.57 to $49.70 in just about 2 months’ time. A 60% gain.

The “Hormuz Hurricane” is forcing every asset class to play its volatile game. The way a hurricane in my neighborhood of South Florida gradually sucks all the moisture out of the air to feed its greed, so to speak. It creates a highly liquid situation for the storm, but the opposite for the rest of the climate around it. 

That is similar to how the Strait predicament is playing out. You see, closing the Strait of Hormuz has been a threat that never came to pass during prior Iran conflicts. This time, it happened. And as a result, the markets can think of practically little else right now. And that will be the case most likely until there’s a resolution. 

What Does the Strait of Hormuz Mean to the AI Trade?

That liquidity vacuum has created an air pocket for the AI trade. High-growth tech and AI firms, which rely on low interest rates and high future earnings, are seeing their valuations compressed. When energy costs spike, they act as a supply-side tax, raising operational costs for data centers while simultaneously pushing the Federal Reserve to keep rates higher for longer. 

That leads to a situation where investors aren’t selling tech because they hate AI. They are selling tech because they must raise cash to cover the surging “War Risk Premiums” and margin calls as the broader indices (S&P 500 ($SPX) and Nasdaq ($NASX)) slide. That’s the case for four consecutive weeks as of now.

The surge in energy is stoking fears of stagflation, which can potentially paralyze the Federal Reserve. Barclays recently estimated that sustained $100-plus oil could push global inflation up by 0.7 percentage points, rendering previous “soft landing” hopes obsolete. And, these prices could shave 0.2 percentage points off global GDP. The Fed cannot cut rates to save the economy because doing so would pour gasoline on the inflation fire. 

The most dangerous part of this storm is the disconnect between oil futures and physical oil. While futures are trading north of $100, the scarcity of actual barrels has refiners in Asia paying massive premiums. This means the real-world damage to trucking, airlines, and manufacturing is actually much worse than what the headline oil price suggests.

The Strait of Hormuz has turned the market into a 1-factor model. But it is not a simple one. Until this situation dissipates, every long opportunity outside of energy is essentially fighting this pressure. 

Do you have that Strait now?

Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.