Overnight, the United States launched strikes against Iranian military targets in response to Monday's tanker attacks in the Strait of Hormuz. Hours later, the Treasury revoked the waiver that had allowed Iran to sell crude oil on the global market since late May. Iran retaliated by firing missiles at U.S. military installations in Kuwait and Bahrain, the first direct strikes on American bases in the Gulf since the ceasefire framework was signed. By the time Asian markets opened, Brent crude had surged roughly 6%.
The ceasefire framework that brought oil from triple digits to below $70 is now in question. The Treasury had authorized Iranian oil sales through August 21 as part of the broader negotiations. Iranian exports had climbed back to roughly 1.5 million barrels per day under the waiver, easing a supply picture that had been stretched since late February. That authorization ends July 17, and new transactions are frozen immediately. Pulling those barrels off the market tightens global supply at the same time OPEC+ has extended its own production cuts through the end of the year.
For energy investors, the positioning shift is straightforward. U.S. producers with zero Middle East exposure are the cleanest way to own the oil trade again. ConocoPhillips trades at roughly 11 times forward earnings with a 2% yield and no refining operations to complicate the upstream picture. Devon Energy trades for about 8 times this year's expected earnings with a variable dividend model that directly passes through higher crude prices to shareholders. Diamondback Energy is running the Permian Basin at all-in costs below $40 a barrel, meaning every dollar above that flows to buybacks and dividends. None of these names carry Hormuz transit risk.
The refining side is more nuanced. Higher crude input costs compress margins unless product prices move with them. But crack spreads tend to widen when supply disruptions are geographically concentrated, and Gulf Coast refiners like Valero and Phillips 66 source most of their crude from domestic and Canadian pipelines. If Brent-WTI spreads blow out again, those refiners actually benefit.
Defense names are the other obvious beneficiary. Northrop Grumman carries a $78 billion backlog and generates roughly $3 billion in annual free cash flow. L3Harris just raised its full-year guidance on the back of a $22 billion order book. Both trade at 18 to 20 times earnings, a discount to the broader market for companies whose revenue visibility stretches five to seven years. When the Strait of Hormuz escalates, the budget conversation in Washington shifts from "how much" to "how fast," and the supplemental spending argument restarts.
The inflation wrinkle is the part the market has not priced.
Two weeks ago, core PCE hit a three-year high. The June dot plot showed half the committee projecting at least one rate hike before year-end. Warsh himself abstained from the dot plot, but nine of eighteen participants who submitted projections see rates going higher. Oil below $70 was the one input that gave the doves a case for patience. Brent at $78 takes that argument off the table.
The FOMC minutes from Warsh's first meeting as chair land at 2:00 PM today. The committee held rates steady in June but called inflation "too high" and dropped the forward guidance language it had relied on for years. The minutes will reveal how firmly the committee was leaning toward a hike rather than a cut. They were written when oil was in the $60s. The committee reads them back today with oil above $75.
The PCE report from June 26 showed core inflation accelerating for the third straight month to 2.8%. At the time, the market shrugged because energy prices were falling and the labor market was softening. The energy assumption just broke. If July CPI prints hot on the back of this oil move, the September hike probability goes from coin flip to near certainty.
Gold is holding above $4,100 this morning. It was already at record levels before the strikes, and the safe-haven bid just got a fresh catalyst. The 10-year yield at 4.56% means gold is rallying despite higher real rates, which tells you how seriously the bond market is taking the geopolitical risk.
Delta reports Friday morning, and the airline math just changed. Jet fuel accounts for roughly 20% of operating costs, and every $10 per barrel increase in crude adds roughly $3 billion in annual fuel expense across the industry. The Street is modeling around $1.48 in Q2 EPS. The quarter is already in the books, so the results are safe. But the forward guide will be where the oil shock shows up.
Tuesday's close: S&P 500 at 7,504. Dow at 52,925. Nasdaq at 25,819. Brent crude surging to around $78. Gold above $4,100.
