Tag: Iran
Asset Allocation Bi-Weekly – China Cuts Its Energy Imports (June 15, 2026)
by Patrick Fearon-Hernandez, CFA | PDF
As we’ve noted before, the most immediate economic and financial market risk from the Iran war is the possibility of further price hikes for oil, natural gas, and some other commodities that depend heavily on shipping through the Strait of Hormuz. Because of the war, the strait has now been essentially shut down for more than three months. Global energy and other commodity prices have indeed increased. As shown in the chart below, near Brent crude oil futures prices jumped approximately 50% in the weeks after the war started on February 28. However, the escalation in prices has been relatively contained and prices have even started to fall back recently. That’s despite assurances from economists and energy analysts that prolonged closure of the strait would inevitably lead to further price hikes. In this report, we show that a massive pullback in Chinese energy imports has probably been a key reason why prices haven’t risen as much as feared, at least so far. We also show that the pullback in Chinese energy demand has helped set the stage for recent stock market dynamics.
The unexpected pullback in energy prices was a mystery in recent weeks, especially since official data and anecdotes suggested that the closure of the strait was forcing countries around the world to use up their inventories. For example, the International Energy Agency warned in its May market review: “The world is drawing oil inventories at a record pace as importing countries confront unprecedented disruptions to Middle Eastern supplies.” According to the IEA, global oil stocks had plummeted by almost 250 million barrels since the start of the war, with even steeper declines if stranded stockpiles in the Middle East are excluded. Such inventory depletion would normally be expected to boost prices.
More recent data appears to solve the mystery about why energy prices haven’t risen further and have even fallen back. Recent data shows Chinese oil imports have dropped to approximately 6.6 million barrels per day, down 38% from the average of about 10.6 mbpd in 2025. The drop of about 4.0 mbpd equates to almost 4% of current global oil demand. It could also offset much of the net reduction in global oil shipments through the strait, which analysts estimate to be between 6.0 and 12.0 mbpd.
Chinese energy imports and inventories are notoriously opaque, so these figures are uncertain. Nevertheless, if China really has cut its energy imports as indicated, it would go far toward explaining why energy prices have started to pull back, at least for now. We still believe that a long delay in opening the strait would keep alive the risk of further energy inventory depletion and renewed price spikes. However, China’s apparent disdain for paying elevated prices and its willingness to cut back deliveries is having a salutary impact on global prices and helping calm the world’s financial markets for now.
Going forward, if this trend continues, it will have big implications. For example, China’s ability to forego expensive energy imports helps validate its “all of the above” energy policy, in which it has invested in the full span of possible energy sources, ranging from coal, oil, and natural gas to nuclear, wind, and solar. China is now benefiting from the flexibility it has gained from having such a broad array of energy sources. We also think this situation illustrates how much economic flexibility China has gained from building its enormous strategic reserves of energy and other commodities. Although China won’t reveal the true level of its inventories, outside analysts estimate that they are currently several times bigger than the US’s Strategic Petroleum Reserve. It would be no surprise if governments around the world now take a lesson from China’s approach and try to adopt a similar all-of-the-above energy policy and start rebuilding inventories once the war is over and prices come back down.
For the financial markets, the decline in oil prices wrought by China’s import cuts has probably been a key reason for the recent modest retreat in inflation concerns and in government bond yields. For example, the yield on 10-year Treasury notes fell from about 4.65% in mid-May to about 4.45% at the start of June. We suspect this has encouraged investors to return to the frenzied buying of US large cap technology stocks related to artificial intelligence. It has also arrested investors’ early 2026 rotation toward value stocks. As we noted above, however, the continued war in Iran is likely still depleting energy inventories around the world, including in China. That likely translates into a continued risk of further energy price spikes and rising bond yields in the coming months if the war isn’t resolved.
Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify
Confluence Mailbag – #10 “The End of Hegemony, the Iran Stalemate, and the AI Bubble” (Posted 5/26/26)
Asset Allocation Bi-Weekly – The Power of Gold (May 11, 2026)
by Patrick Fearon-Hernandez, CFA | PDF
Since the Iran war began on February 28, several corners of the financial market have behaved in unusual and unexpected ways, with gold prices being perhaps the most surprising. Gold has been a safe-haven asset for centuries, and investors have come to expect its value to rise in times of crisis or conflict. Indeed, many investors hold gold specifically to hedge against political instability or other disasters, just as they tend to hold it to hedge against currency debasement or price inflation. In this case, however, gold prices fell sharply in the days after the war commenced and have only modestly rebounded in recent weeks. What’s behind this extraordinary behavior?
In our view, gold prices fell mostly because central banks and other major investors have been trying to raise liquidity ahead of an anticipated spike in costs. For example, since most oil is traded in dollars, central banks in oil-importing countries must raise greenbacks to prepare for a surge in oil import costs. The chart of gold prices above illustrates the phenomenon. In the chart, the vertical red line shows when Turkey’s central bank announced it would sell 60 tonnes of gold to raise dollars. Other central banks also reportedly started selling gold at about the same time, taking profits after gold prices skyrocketed in the months ahead of the war. This also marks the date when gold prices began to soften in response to all this selling. Gold prices dropped from about $5,200 per ounce in early March to about $4,700 per ounce at the end of April, for a decline of almost 10%. In contrast, other traditional safe-haven assets have held their value much better. Medium-term Treasury notes had a negative total return of 1.5%, while three-month bills returned about 0.6%.
One new factor is that many foreign reserve managers now see gold as a replacement for US Treasurys. It therefore makes sense, in a crisis, for them to sell the yellow metal to raise liquidity. Before the US levied sanctions on Iran and Russia in recent years, reserve managers tended to view Treasurys and gold as complementary: Gold was held as a long-term asset, while Treasurys were prized for liquidity management. Thus, gold sales were rare, and when they were executed, it was usually due to a structural decision as to the allocation of gold and Treasurys. Following the US imposition of sanctions on foreign-held Treasurys, gold is now being seen as a substitute. One change this appears to be causing is that reserve managers will now sell gold to raise liquidity. Due to this change in reserve management practice, we think gold prices are likely to become more volatile going forward.
An important question is whether gold will rebound and regain its reputation as a safe-haven asset. On that score, we’re optimistic given the historical behavior of commodity prices generally, and gold prices in particular, during periods of conflict and geopolitical upheaval. In the chart above, the red line shows how the inflation-adjusted CRB commodity-price index has changed over time. The green, downward-sloping trend line shows that real commodity prices tend to fall over time. This is what would be expected in a capitalist economy that incentivizes commodity producers to boost output and users to use less. However, in periods of geopolitical conflict or major supply disruptions, such as the periods around World War II and in the mid-1970s, commodity prices may spike well above the trend and stay high for some time. We think we’re heading into an era like that now. In fact, we can see that the red index line is now moving above the trendline.
For centuries, gold has been prized as a safe, secure store of value based on characteristics such as its density, malleability, and resistance to corrosion. We therefore believe that its recent liquidity-driven selling is likely to peter out soon, if it hasn’t already done so, even if gold prices remain more volatile than in the past. We also think global central banks could replenish their gold holdings once the war in Iran cools down. After all, we think many central banks want to continue diversifying their reserves away from the US dollar and the risk that dollar holdings pose for US sanctions. The recent modest rebound in gold prices gives us some confidence in that stance. In fact, we have recently increased our exposure to gold in some of the Confluence Asset Allocation strategies, while keeping our allocations to the yellow metal unchanged in the others.
Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify
Confluence Mailbag – #9 “Dollar Dominance, Private Credit, and the Great Rotation” (Posted 4/24/26)
Bi-Weekly Geopolitical Podcast – #85 “The War in Iran and the End of US Hegemony” (Posted 4/20/26)
Bi-Weekly Geopolitical Report – The War in Iran and the End of US Hegemony (April 20, 2026)
by Patrick Fearon-Hernandez, CFA | PDF
In a Bi-Weekly Geopolitical Report late last year, we argued that the 2025 trade dispute between the United States and China revealed just how dramatically Beijing has increased its comprehensive power — military, political, economic, and technological. We argued that China’s comprehensive power may now rival or even surpass that of the US, potentially ending the US’s traditional role as the global hegemon, i.e., the big, strong, dominant country that provides the world with security, order, and the reserve currency. Now that the US has launched a war against Iran — a key member of China’s geopolitical and economic bloc — the world has seen additional evidence that the US may not continue as a hegemonic power. In this report, we examine the evidence pointing to the US relinquishing its hegemonic role and what that means for investors.
Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify
Asset Allocation Bi-Weekly – #160 “Wars, Price Shocks, and Inventories” (Posted 4/17/26)
Asset Allocation Bi-Weekly – Wars, Price Shocks, and Inventories (April 13, 2026)
by Patrick Fearon-Hernandez, CFA | PDF
Since the launch of the US-Israeli war against Iran on February 28, if there’s been one dramatic feature, it’s that the conflict and official statements about it have shifted dramatically almost on a daily basis. By the time this report is published, the war could be going in a wholly different direction from when we started writing it. Nevertheless, we do think we can make some predictions about how the conflict will affect the global economy over the long term. One such prediction touches on how corporate behavior may change in the future. Specifically, we think the war will spur companies to once again embrace high inventories to shield themselves against supply disruptions and associated price jumps. A broad return to higher inventories will likely have important implications for corporate profitability, facility-site decisions, and stock valuations.
The chart above shows the inflation-adjusted value of US private sector inventories as a share of gross domestic product (GDP) since the end of World War II. Clearly, the overall trend has been for companies to hold less inventory compared with their sales. What explains this? We believe many factors are responsible. For example, the extremely high inventories around World War II and the Korean War probably reflected hoarding at a time of limited consumer sales. Inventory holdings would have naturally fallen as the end of those conflicts allowed for normalized supply dynamics and rebounding consumer spending. At the same time, innovations in transportation quickened delivery times and reduced freight costs, while the information technology revolution improved the ability of firms to optimize inventory holdings. And, as we’ve argued many times before, the end of the Cold War convinced many business managers that global peace was at hand and that competing in the era of globalization required using just-in-time inventory management.
Equally noteworthy, the decline in price inflation since the early 1980s has made inventories less needed. Indeed, the chart above shows a long, steep decline in inventory ratios starting in the early 1980s when the Federal Reserve under Chair Paul Volker hiked interest rates and Congress passed a series of deregulation bills, both of which slashed price pressures on the economy. Just as important, the chart clearly shows how rising inflation in the 1960s and the energy crises of the 1970s prompted a big jump in inventory holdings equal to about 1% of GDP. The chart also shows that after commodity prices surged around 2005, firms boosted their inventory holdings. That inventory investment was short-circuited by the US housing crisis, but once the recovery started, inventories climbed back to almost 14% of GDP.
This review of history suggests that as company management internalizes the commodity supply shocks and rising prices associated with the war in Iran, there will likely be a rebuilding of inventories. More broadly, as it becomes increasingly clear that the war reflects a wider geopolitical change marked by a US retreat from hegemony, global fracturing, and increased international tensions, we think the rebound in inventories could be bigger and longer lasting than the one in the early 2000s. We also believe this trend will extend beyond the US, with companies around the world incentivized to boost their inventory holdings again.
What firms will be most affected? In the chart above, we focus on the US Census Bureau’s current series of monthly business sales and inventory data, in nominal terms, which allows us to trace corporate inventory/sales ratios by sector. The chart clearly shows that the rise in the overall inventory/sales ratio since the early 2000s has come from higher manufacturing stockpiles. This makes sense to us, as supply disruptions and higher costs for inputs and components are probably more important for manufacturers than for wholesalers or retailers. Going forward, we suspect that the Iran war will especially boost inventory holdings at the factory level.
In our view, any broad, sharp rise in manufacturers’ inventories from here on out will have significant investment implications. For example, holding more inventories will tie up more of manufacturers’ capital and increase costs. Investors are therefore likely to put higher valuations on the stocks of manufacturing firms that can better control their inventory levels, all else being equal. Given that the US is now a net energy exporter and has significantly greater levels of secure supplies of oil, gas, and other key commodities, we expect many foreign manufacturers to move production to the US, helping to reindustrialize the US economy and stimulating business for US suppliers. The need to store more inventory could also lead to increased demand and stronger rents for firms that own commercial warehouses. All the same, higher inventories will generally result in a less efficient economy than in the just-in-time world of globalization, so price inflation is still likely to be higher and more volatile than in years past, and the same will likely be true for interest rates.