Oil Price Increases & Its Economic And Stock Market Effects
Continued damage to oil production, along with cutting off the supply of oil through Hormuz will have long-lasting and devastating economic effects—I'm preparing
The economics of oil supply disruptions could be disastrous for inflation and economic growth, but that may be short-lived. While most are focused on the overall price of oil being as high as it is, I am thinking in other terms, namely that there is a worldwide production system that is dependent upon a certain amount of oil available in the world, not so much the price of oil. With the Straight being effectively shut down, there is a massive 20% of capacity that is simply no longer available to the free-flowing economy.
There is more to that picture: some of the damaged facilities will take years to recuperate. Even if the Straight were reopened tomorrow, the disruption’s effects would take months to rebalance. Given the back-and-forth nature between the sides, tomorrow seems an impossibility.
On the one hand, there is the immediate pain at the pump. This will trickle through to all goods throughout the United States as the cost of shipping increases—Food prices will certainly head even further higher.
On the other hand, there is something else that I have not seen anyone else make mention of: US oil producers have not seen any amount of capacity disruption. In fact, input costs for US producers, the world’s largest, have not shifted whatsoever. Yet, the price at which oil companies are now able to sell their barrels has doubled almost immediately. This is, essentially, pure profit to these producers.
Energy Sector ETF
The energy sector has been seeing steady increases in valuations since the COVID shutdown, albeit a much slower pace than the AI stocks. Now, there is likely further gains ahead for US producers. When there is some ‘removal’ of supply, such as sanctions versus Russia and their inability to sell in the open market, these producers have sen increased market reach. I am thinking the latest supply shortages are greater production opportunities for US producers.
While some of these producers are global with oil production worldwide, the United States has seen zero effective input cost increases or disruptions. This would mean the entire oil sector should see a rush of companies racing to get additional oil to market in order to earn that richer margin. The problem is that restarting, or initializing oil production, takes time. Firms will race to get rigs online as fast as possible, and increase production as quickly as possible.
The status quo is that there is missing supply as the Straight gets backlogged. US firms, and likely other nations not involved in the Straight, will push their production capacity. Eventually, either the Straight will be reopened, or there will be sufficient increases in oil production from elsewhere that takes up slack—all of a sudden you find yourself saying: Hmmm… Venezuela?
Inflation & Missing Supply
Oil affects nearly every aspect of our daily lives. First, and most immediately: Gas prices at the pump. Keep in mind, however, that transportation of goods also pay the price at the pump, and those additional costs will eventually show up at every corner such as groceries, electronics, clothing, and building materials.
This leads me to look to Treasury yields to see what the market believes will be probable for inflation.
Interest Rates
Last week, I talked about the US 10-Year Treasury breaking upward, and because of that, the equity markets slipping lower. That occurred, obviously… there may be a lot more.
Without the supply disruptions, inflation has been trending back upward. The Federal Reserve is certainly not in a position to lower interest rates now that gas prices have jumped as much as they have—the Fed would address price increases before considering economic downturns.
There are other issues that are not immediately obvious: The debt. With any economic downturn there will be lower tax revenue brought in by the Federal government. Along with that, the overall cost of military activity would increase the debt further.
I have been saying for some time that I believe the debt will be a bigger and bigger issue going forward. These events are merely bringing that bell toll closer to today.
I vigilantly watch the 10-year yield. This week might see more moves upward more rapidly, albeit this past week’s move upward was concerning. If the Treasury market breaks, there’s no fixing it this time by ‘backing off’ like last April’s Liberation Day events.
Equity Markets
Along with last week’s move in the Treasury yields, it is the stock market that I think is about to really get pushed around. There does not appear to be any offramp for the attacks on Iran. I expect the stock market to continue to slide lower, but eventually I expect there to be a very loud collapse. This is what I am gearing up for.
Gold
There was a surprising move downward in the price of gold over the week, and while I would like to be a buyer in order to take advantage of the inflation increase, the Treasury yields heading higher likely have ‘spooked’ shiny metal investors.
With interest rates heading higher, asset appreciation stops and reverses.
AI Prediction
I had been short the broader stock market over the past few weeks, since January, actually. The positions have been profitable, and on Friday my latest leg ended. I am looking to be short the stock market for far bigger moves to the downside while also I am eyeing up long positions on
The Query
A lot has occurred over the past week since my last query. First, my concerns were the US 10-Year Treasury yield, which last week was trading below 4.20%, but is now above the 4.3125% level. I am concerned about the deficit, which continues to grow fast. I am concerned about a slowdown in economic activity because of the war with Iran.
The price of oil is trending higher, but remains in a tight band. There have been more attacks on infrastructure in the Gulf region, and there are now significant losses to production capacity which will take years to rebuild. Because of this, there is simply missing supply. Many manufacturing inputs throughout the world are dependent upon the current equilibrium level of supply and demand. Without increased production from elsewhere, that missing supply could be a serious concern. These manufacturers will begin to fight over the now reduced supply levels of available oil, gas, and natural gas.
On the one hand, US producers have not seen any disruption to supply. These producers may be able to ramp up production, but this will take a significant amount of time.
On the other hand, those same US producers have a new monopoly-esque market to perform in. Whereas on February 27th, those producers were selling their oil at $65 per barrel, they are now selling at double at $120 per barrel. Mostly, this would be pure profits as input costs have not shifted yet.
I firmly believe that Israel has nearly run out of capabilities to fend off attacks against Iran’s drones, but Iran does not necessarily have an endless supply of drones—all of this is rumored to be true. Because of this, Iran may not necessarily need to get to any negotiating table too fast, which means they can continue to create havoc and attack more production capabilities, while also keeping the straight closed, if but with sea mines alone. what are your thoughts on this?
Given all that is happening, what are your thoughts on the price of oil moving forward?
Next is the inflation picture, which that had already been trending upward, and now with the price of oil moving upward as it has, the Treasury yield is likely to remain elevated. What are your thoughts on the potential of the US 10-Year moving up to 5.00% considering an economic slowdown potential and increasing unemployment potential, along with the deficit issues?
Finally, there is the price of gold, which all last week sold off somewhat. My thinking here is that if interest rates continue higher, gold, as an asset class, will likely top out because of higher yield levels. This, however, would be short-lived if the inflation picture were sorted out over about 1.5 year’s time, along with the war, and then the Federal Reserve dropping interest rates later. What input do you have about this?
The Response
My take: oil, 10Y to 5%, gold, and what actually matters next
Your framework is coherent: this is no longer just a “macro slowdown” story or just a “war premium” story. It’s a supply destruction + inflation shock + fiscal/term premium story. That combination is why the usual safe-haven pattern in Treasuries is not dominating.
A few of the things you’re citing are also broadly consistent with current reporting:
10Y yields have risen sharply from late-Feb/early-March lows into the low/mid-4.3s, with some reports noting recent highs near 4.39% as oil-war inflation fears rose and rate-cut expectations faded (CNBC, Reuters, Trading Economics).
Oil has traded above $110 with some intraday spikes reportedly near/above $119 amid attacks and disruption risk in the Gulf (CNBC, CNBC).
Market concern is increasingly about war-driven inflation plus deficit/issuance pressure raising the term premium, not just growth slowing (Business Insider, Reuters).
So let’s separate this into the three pieces you asked about.
1) Oil moving forward
Your core point is right
If production capacity has been materially impaired and supply is missing, the market can’t price oil as if this is just a temporary shipping scare. It becomes a physical balance problem, not just a geopolitical premium.
That means oil now has 3 layers in it:
Current physical loss
Future supply uncertainty
Embedded war risk premium
The most important distinction
If the disruption is mostly:
Transit/shipping → oil can retrace faster once convoying, rerouting, or de-escalation emerges.
If it is:
Production/infrastructure destruction → oil stays structurally higher because barrels are genuinely gone.
From what you’re describing, you’re focused on the second case, and that is the more serious one.
My base case on oil
If the missing supply is real and rebuilding takes years, then oil probably does not quickly return to the old equilibrium. In that case:
The floor rises materially
Pullbacks get bought
The market begins rationing demand through price
So instead of “spike then collapse,” the likely pattern becomes:
High plateau
Violent swings around that plateau
Persistent upside risk on any new attack headline
What likely happens next
US producers may respond, but shale is not an instant valve
OPEC spare capacity matters only if it is physically accessible, politically deployable, and not itself under risk
Demand destruction eventually happens, but only after price pain works through transport, chemicals, manufacturing, and households
So my view:
Oil is more likely to remain structurally elevated than to fully mean-revert, unless the market learns that the physical damage is smaller than feared.
If the conflict persists and infrastructure losses deepen, the path of least resistance for oil is still upward-biased.
2) Could the US 10-Year move to 5.00%?
Yes, but that is not yet the base case
Right now, the move in the 10Y is being driven by:
Higher inflation expectations from oil
Lower probability of Fed cuts
Higher Treasury supply / deficit concerns
Higher term premium
That combination is very real. Reuters noted that consensus still leaned toward only a gentle drift higher, but explicitly acknowledged upside risk if war/inflation persist (Reuters).
What would push the 10Y to 5%
You’d likely need three things at once:
Oil stays above $100–$110 for long enough to alter inflation expectations
The Fed signals no cuts—or even reopens the door to hikes
Treasury issuance/deficit anxiety intensifies, pushing term premium higher
That’s the path to 5%.
What would stop it from reaching 5%
The counterforce is exactly what you mentioned:
growth slows,
unemployment rises,
markets begin pricing recession.
If that growth scare becomes dominant enough, long yields can stop rising even with high oil, because the market starts to focus on future demand destruction and eventual policy easing.
My view on 5%
I’d frame it this way:
4.4%–4.75%: very plausible in this regime
5.0%: possible, but requires persistence in oil shock + fiscal fear + sticky inflation
Above 5% and staying there: much harder unless inflation broadens meaningfully beyond energy
So yes, 5% is on the table, but I would not call it the central case yet. It’s the stress case that becomes base case if oil remains high long enough to contaminate broader inflation.
3) Gold: does higher yield cap it?
This is where your thinking is directionally right but incomplete.
In a normal cycle
Higher nominal yields:
hurt gold
because gold has no cash flow
and opportunity cost rises
In this cycle
Gold is not just trading off nominal yields. It is trading off:
real yields
inflation expectations
fiscal credibility
geopolitical hedging
central bank buying
That’s why gold can sometimes hold up even as nominal yields rise.
So what happens if rates keep rising?
There are two possibilities:
Case A: rates rise because real yields rise
That is more dangerous for gold. If the market says:
“Growth is fine, Fed is firm, real return on bonds is attractive”
then gold usually struggles.
Case B: rates rise because inflation expectations and term premium rise
That is much less bearish for gold. If yields rise because:
deficits worsen
inflation risk rises
bond supply rises
geopolitical instability grows
then gold can still do well.
That second case looks closer to today’s environment.
My take on gold here
I do think gold can have sharp consolidations or selloffs if yields jump fast. But if the reason yields are higher is fiscal stress + inflation uncertainty + war risk, then gold’s longer-term uptrend is not necessarily broken.
So I would phrase it this way:
Higher yields can create a short-term top in gold, but not necessarily a durable one, if the yield rise is driven by inflation fear and sovereign balance-sheet stress rather than genuine real-growth strength.
Your 1.5-year view is very plausible:
short-term pressure from high yields
later support if inflation moderates, war de-escalates, and the Fed can cut
But I’d add: If the deficit/war/fiscal story worsens, gold may not need the Fed to cut in order to recover.
Big synthesis: what regime are we in?
This is starting to look like a stagflation scare regime, even if not full stagflation yet.
That means:
Oil stays firm/high
Long bonds struggle
Fed flexibility is limited
Gold is volatile but fundamentally supported
Equities become much more selective
The real pivot point is not whether unemployment rises next month. It’s whether:
Oil stays high long enough to enter core pricing behavior
The 10Y rise begins to tighten financial conditions enough to hit demand
Deficit concerns become a genuine term premium event rather than just a talking point
My bottom line
Oil: likely structurally higher unless physical damage proves overstated or supply normalization happens faster than feared.
10Y to 5%: possible, especially if high oil persists and fiscal/term premium expands; not yet my base case, but no longer remote.
Gold: vulnerable to short-term yield spikes, but medium-term still supported if higher yields are being driven by inflation/fiscal/geopolitical stress rather than true real-growth strength.
My Take
I am looking to go long oil over the following few weeks as I believe the events with Iran will simply get worse and worse. I am also looking to get short the equity markets again as my positions expired on Friday. I think it will be a long time before there is any relief in the price of oil, and because of that, this will continually wear on equities, which are also going to be driven by Treasury yields.
The moves may be big and fast. I won’t sit on any one position too long, but take profits rapidly.