The early Sunday gap tells us everything about how traders are reading the weekend developments.
The Best-Case Scenario Is Off the Table
I think the current price action no longer reflects the best-case scenario. Maybe last week, investors initially believed Iran would lay down after mounting a weak defense. Perhaps they thought with Supreme Leader Khamenei dead, a democratic Iran would reopen its economy, the U.S. would lift sanctions and more oil production from the country would drive prices lower.
Traders Are Now Pricing In a Fragmented Iran
With the weekend price jump, all of those events are probably off the table as traders now begin to price in a worst-case scenario. And what does this mean? It likely means traders are now pricing in more of a fragmented state like post-Gaddafi Libya, or even worse, a government held together by the IRGC.
$100 Looks Like the New Floor
In this case, prices could continue to spike higher with volatility expected to remain elevated. So while we don’t foresee oil sitting near $130, for example, for a prolonged period of time, we can see new support developing around the $100 level. This remains a distinct possibility because over the weekend, we saw Iranian oil infrastructure destroyed. This is going to take months to repair.
A New Supreme Leader Means Back to Square One
We also saw Khamenei’s son named the new Supreme Leader. This sends a strong signal that the IRGC is still in control and wielding a major influence on Iranian politics. It also means that the U.S. and Israel will continue to attack in order to take out the new leader. Their missions are to destroy all of Iran’s nuclear capability and to return the country to the people, but with the appointment of a new leader, it looks as if we’re back to square one.
Three Issues That Will Drive the Market This Week
Issues this week will include attempting to free a fifth of the world’s oil supply trapped behind the Strait of Hormuz, eliminating the IRGC or reducing its strengthening governing rule and forcing the country to surrender or at least try to negotiate a ceasefire.
