MacroVoices #530 Daniel Lacalle: China and The Us Will Decide The Outcome of The Iran War

The geopolitical risk premium that oil prices lost over the past 3 years (which was abnormal) is now back and may last for a prolonged period, which is what investors should focus on rather than trying to predict the absolute top or bottom of oil prices.

“The geopolitical risk premium that oil prices completely lost in the past 3 years, which was an abnormality, to be fairly honest, is not only back on, that it but it may probably last for a prolonged period of time. And that's where we have to focus, in my view, and not necessarily where they can go because they they can spike, and they can go You can have a a post on Truth Social from Trump, and the and oil prices plummet $10.”

Europe faces 'only a few weeks left of jet fuel' but will not run out; instead, it will pay five times the usual price for fuel, which is eroding consumer sentiment to the lowest level since the pandemic and undermining companies' investment decisions and working capital management.

“Europe has basically a few weeks left of jet fuel. It's not going to run out of jet fuel, it's going to pay five times what it usually pays. And that is obviously eroding consumer sentiment. Consumer sentiment in the European Union is at the lowest level since since the pandemic. It's also having a very very substantial impact on companies' investment decisions, on the ability to manage working capital.”

Oil prices have already reached the top and will remain elevated but not spike higher because the forward curve is in huge backwardation and already discounts that global supply will be managed by combining oversupply from 2025, US exports, Russian exports, Saudi exports, and higher Venezuelan output.

“In my opinion, oil prices have already reached the top. From now on, I think that oil prices are now discounting that there's go- and the futures curve is in huge backwardation, also seems to be discounting that. Even if the situation ends in no progress, that global supply of oil is going to be managed between the oversupply that existed in 2025 plus the exports of the United States plus the exports of Russia plus the exports of Saudi Arabia. And basically, those added to higher Venezuelan output are likely to be cushion elements on the marginal oil price.”

European financial sector faces significant challenges as stress from supply disruptions and margin compression will manifest through lagged effects on credit conditions and bank provisions, making European financials a relative underperformance trade versus US counterparts in the medium term.

“people need to be thinking about the challenges for the financial sector of continuing to lend and not face significant provisions, particularly in the case of the European Union. They're always a lagged effect.”

Oil prices are unlikely to fall to $50 per barrel (as they did after 2008) because policymakers are now focused on maintaining aggregate demand, so energy will no longer be the disinflation factor it was between 2023 and 2025, and it is also unlikely oil will reach $212 (the real-terms equivalent of the all-time high).

“I think this is not the case. Why? Because in 2008, you had a huge crisis, but now all policy makers are focused on maintaining aggregate demand. Therefore, I would say we need to be used to the fact that energy is not going to be the disinflation factor that it has been between 2023 and 2025...So, I think that basically, just to summarize it...the bottom is higher and that the top is much lower.”

While the S&P 500 is trading at 52-week highs, the breadth of the market (percentage of stocks in uptrend) is under 50%, meaning 50% of stocks are in downtrend; this shows how concentrated the entire advance has been in the Mag Seven AI stocks and how important their continued rally is to keep the market going higher.

“From a market breadth perspective, while we're trading at these 52-week highs, the breadth of the market is under 50%, which is essentially means that 50% of stocks are actually in a downtrend. Really shows how concentrated this entire advance has been in this AI story and how important these mag sevens rallying here is to keep this going.”

The US dollar index is strengthening in a risk-off environment due to elevated shorts on the dollar in 2025, but will stabilize rather than enter a secular uptrend once the conflict ends, with the DXY expected to range between 96-101 as the logical trend.

“I think that the upward trend of the US dollar is clearly a sign of risk-off environment, and also is clearly a sign that there was an uncomfortably high level of shorts on the US dollar in 2025 in particular. I think that all of that has sort of cleaned up a little bit, but I don't see the US dollar strengthening in an environment in which the conflict ends. I see it stable. The DXY index as as we speak at 96.5. It moves up at 100, 101, it moves down. I think it's That's sort of the the trend that the US administration, that the Federal Reserve, that the market sort of sees as the logical trend for the US dollar.”

Treasury yields are directly correlated to oil prices and inflation expectations; as oil breaks out, yields break out, and if oil moves above $120, Treasury yields could spike toward 2025 highs, with the correlation visible across the entire yield curve (silver, 30-year, etc.).

“What we continue to see is a direct correlation of rates to inflation expectations driven by the next move in oil. And so, as oil broke out here on the upside, so did yields. And now, while I'm showing the chart on the 10-year yield breaking out towards 4 and 1/2 on the upside, you can see this on silver futures, you can see this on the 30-year. Doesn't matter where on the curve you go, we're getting that direct sensitivity to this move in oil. So, I think that the one thing to just respect here is that if oil was to break out, which is not a certainty, but if oil was to break out above 120 and get running on the upside, that almost certainly put some short-term pressure on this causing yields to potentially break out back towards 2025 highs.”

Despite structural economic damage building from the energy crisis, equity markets will continue to do pretty well (likely into the medium term) because liquidity and policy support are overriding fundamental deterioration signals.

“And apart from that, you're going to continue to see equity markets doing pretty well.”

In 2022, after the initial Ukraine war energy crisis, European countries misinterpreted supply chain flexibility and a mild winter as a policy success rather than taking it as a warning signal to diversify energy sources and guarantee security of supply, leaving them unprepared for a more severe 2026 disruption.

“In 2022 we had a very let's say benign outcome of the beginning of the Ukraine war...There were huge concerns about security of supply in cereals, in energy of course, etc. But because of the flexibility of supply chains and all the things that you just mentioned, what ended up happening was that added to a very mild winter oil, natural gas prices, etc. All of them ended the year well below the levels at which they started throughout the Ukraine war. And a lot of countries, instead of taking that as a warning signal, particularly in the European Union, warning signal, we have to make an extra effort to guarantee our security of supply, the flexibility of our sources etc. Instead of that, what they did was to think it was a a policy success.”

Iran's economy is already in severe distress with 60% inflation, capital flight, and ongoing protests from 2025; however, the Iranian regime can sustain the Strait closure longer than Europe or most emerging economies can, because 25% of Iran's GDP and 60% of its government revenues flow through the Strait, meaning a closure is most damaging to Iran itself but the authoritarian regime structure allows it to absorb the pain longer than democracies.

“There is something that is debatable, which is is the Iran regime going to change its position in an environment in which the Iranian economy is completely demolished? Because it was already obliterated in 2025 and 2024. Remember that we closed 2025 with protests all over Iran, 60% inflation, capital flight, everything. So, yes, the Iranian economy is doing really badly. And the most impacted by the shutdown of the Strait of Hormuz is Iran itself, cuz 25% of its GDP and 60% of its government revenues flow through the Strait of Hormuz. But, the regime can stay in the way that they are for longer than what Europe, many emerging economies can actually sustain, no?”

The UAE pulling out of OPEC signals that the UAE will produce at maximum capacity going forward rather than respecting quotas, and this will likely force Saudi Arabia to increase production as well, suggesting that spare capacity in global oil markets will become a thing of the past and OPEC will no longer be able to manage prices or contain future upside spikes.

“The UAE is basically telling Saudi Arabia, 'We're not playing this game anymore. We're going to produce as much as we want.' At that point, Saudi is the only one that has any spare capacity. They're probably going to produce as much as they can in order to keep up with UAE...That will drive prices down when this conflict is over...Longer term, what that actually means in terms of pricing signals is we're not going to have any spare capacity left. The market is going to be incredibly vulnerable in coming years to great big increases in price anytime there's any kind of disruption because we don't have the spare capacity...OPEC will no longer be able to manage markets and will no longer be able to contain any future upside price spikes.”

Large leveraged positions betting long gold and short the US dollar (using Treasuries as source of funds) were unwound in late 2025 when the dollar stopped falling and started to rise, triggering margin calls and forcing gold sales, coinciding with central banks taking profits on gold holdings to mitigate local currency depreciation.

“in the past 18 months, a lot of us saw that there were a lot of positions being built in the market with very little equity, very leveraged positions on gold using as a source of funds the US dollar. So, long gold, short the US dollar, because it's it's been a phenomenal trade. And because it's been a phenomenal trade, a lot of people were putting less equity and more debt. So, what happened is that once the geopolitical risk scenario got worse and people starting to demand more dollars, the dollar stopped falling around relative to most currencies around July 2025, and has been stable, then started to rise. So, margin calls started to appear.”

Everything being discussed (energy crisis, fertilizer constraints, supply chain disruptions) leads to a situation where Trump and Xi Jinping must reach an agreement beneficial to both, or 'things get really, really nasty for everybody,' which is likely to precipitate some form of agreement wrapping together the trade war and geopolitical challenge into one comprehensive deal.

“all those elements that are creating tensions are likely to come together into some form of agreement that is beneficial for both, or things get really, really nasty for everybody. I think that that is This is the situation that certainly leads many of the expectations and estimates that I see out there to be, in my opinion, way too biased to try to make everything equally damaging for everybody. I think that is incredibly evident for anybody that the United States and China have a huge competitive advantage, be it on their own or be it because of the strong relationship with the second largest oil producer in the world. But, many emerging economies are going to suffer quite significantly...everything that we're discussing today, everything that we're discussing today leads to a point in which Trump and Xi Jinping get together and they reach an agreement that is beneficial for both, or things get really, really nasty for everybody. See what I mean? So, that's why I think that all these little elements that are creating tensions are likely to come together into some form of agreement that sort of wraps the trade war and the geopolitical challenge or the Iran war right now in in some form.”

In response to an Iran conflict supply shock, the market is exhibiting the same denial pattern it did with COVID: people won't believe that an inevitable outcome is actually happening until it has already manifested, and by that point the lag effect of supply disruption will already be felt through refineries and fuel rationing.

“My theory though is that just like the pandemic, what's going on here is people are going to stay in denial because they've never seen anything like this before and they're just not going to believe that what is clearly inevitable is actually happening until it has already happened. And that's starting right about now...We're finally getting to the point where those effects are now being felt in the sense that refineries don't have enough crude oil, they're not able to refine and produce finished products and so forth...if the strait has already been reopened when that shock really starts to hit the market and there's a light at the end of the tunnel, maybe markets will kind of grin and bear it...I think what's more likely is if the strait remains closed for at least another week...as we start to feel those real impacts and we are rationing fuel all around the world, I think reality is finally going to set in with a time lag just like it had a time lag during the COVID crisis.”

The aviation sector will see margins turn to negative much more quickly than markets expect, while the automotive sector will face huge problems with spare parts availability due to shipping disruptions.

“I think people are already aware of that, but I don't think that they're aware of how quickly the margins in the aviation sector go to negative. I think that that's what people are still not paying enough attention to. The automotive sector is going to have huge problems of spare parts, etc.”

Fertilizer availability is not a constraint for producers willing to accept much higher prices, but in the European Union the problem is severe because farming and agricultural sector margins have been obliterated in the past 5 years through taxation and environmentally-motivated regulations, making the sector unable to absorb higher input costs.

“There is certainly a big problem of availability and price of fertilizer. So far, those producers, those farmers and those agricultural firms that are able to accept higher, much higher price of fertilizer are not having a problem of supply. What is the problem? The problem is that, for example, in the European Union, the margins of the farming and agricultural sector have been obliterated in the past 5 years through taxation and completely misguided environmental policies, et cetera.”

Most policy makers in the European Union do not think price controls are a good decision, but there is a growing pressure from populist left and right parties to impose price controls, expropriations, and windfall profit taxes, with the latter (windfall taxes on energy companies) being more likely and more consensual than price controls, though still damaging to supply security.

“Overall, the majority of countries in the European Union don't think that price controls are a good decision. But, there are some We have to remember that there's a huge populist left and populist right in the political spectrum in Europe. The populist left is obviously coming very, very hard. The extreme left is saying, 'We have to start expropriations. We have to start price controls, etc., etc.' Always. They do this...But, in general, I would say that policy makers are very, I would say, reluctant to impose price controls, and certainly very, very reluctant to justify big subsidies...As always, in Europe, we always have politicians that will find any excuse to go out and say, 'Hey, let's put windfall profit taxes on precisely the companies that could actually support the improvement of security of supply...So, that, unfortunately, is less less, I would say, uh consensus. So, there's more of a consensus of putting more taxes rather than than price controls.”

Iran could use a nuclear equivalent environmental option by opening a pipeline and pumping millions of barrels of oil into the ocean if storage runs out, which would be an environmental disaster and a threat to desalination assets of neighboring countries, giving Iran an extreme leverage point beyond simple storage constraints.

“Jim Bianco pointed out on X that Iran does have sort of nuclear equivalent environmental option, which is if they run out of storage to put that oil in, they could just open a pipeline someplace and start pumping that oil into the ocean. That would be an obviously an environmental disaster if they were to pump, you know, more than a VLCC, several million barrels of oil and just pump it overboard. It would pollute the environment and it would put all of the neighboring countries desalination assets at risk.”

There is still an unfilled gap on the DXY chart up to 99.38 from just after the first ceasefire announcement; if Trump orders kinetic military action against Iran (bombs actually drop), this will likely close that gap and spike the dollar to 99.38 or higher depending on the magnitude of the military barrage.

“We still have a big unfilled gap on the Dixie chart up to 99 spot 38 from just after the first ceasefire announcement...If that actually happens and we've got bombs dropping again, that's probably what will give us that gap closing spike up on the Dixie chart...If we get any kind of kinetic action out of this conflict, it suddenly takes it well up to 99 spot 38”