The Washington Post reports:

As stocks soared this week and oil prices dropped amid an apparent cooling of tensions between the United States and Iran, it may have left the impression that the energy shock that rattled the world would quickly fade, along with the risk of sending the global economy into recession.

The optimism may have been short-lived. On Saturday, Iran’s military announced it would reimpose restrictions on the Strait of Hormuz, throwing the critical waterway’s status into doubt.

The uncertainty highlights that beneath that surface, a starkly different reality is unfolding. It is defined by disrupted supply lines and damaged infrastructure, sparking increased concern among the people who produce, transport and depend on energy.

“The people closest to the industry are far more concerned about these disruptions and recognize the length of time it will take for things to return to normal — if they ever do,” said Gerry Morton, oil and gas co-chair at the law firm Baker Botts. “The further away you get from actually being involved in producing oil, the less you seem to be concerned about the physical reality and problems that are there.”

Even investors rushing to tap into market optimism warned in interviews that it masks deep, underlying problems that threaten a reckoning in the not too distant future.

“We know supply chains are breaking down in Asia and even Europe,” said Ritesh Jain, founder of the investment firm Pinetree Macro. “We know a correction is eventually coming. But everybody wants to live the present moment. People are just saying to themselves, ‘They will solve these issues. And if they don’t get solved, we will sell then.’”

“We have to dance while the music lasts and hope you are near the exit door when it stops,” he said. “I am in that exact situation, despite talking to people in the background who know something is going to break.”

That disconnect between what the market is signaling and what is actually happening is increasingly shaping the global economy. As investors and the trading algorithms they rely on react to headlines and hints of diplomatic progress, analysts warn they are overlooking red flags around what is coming in the weeks and months ahead. It has led some of the world’s leading economic voices to warn that complacency is misplaced, including the head of the International Energy Agency and officials at the International Monetary Fund.

Europe is at risk of running out of jet fuel within six weeks. Fertilizer prices have spiked so high that they could force food prices up into next year. There are shortages of key ingredients to make not just products like surgical masks and toys, but all plastics — meaning the cost of any product with plastic packaging could be going up. Factories in countries such as Vietnam and Bangladesh that U.S. corporations rely on to make products are so crushed by soaring energy prices that they are at risk of shutting down.

“Some countries may be richer than the others,” Fatih Birol, executive director of the International Energy Agency, told the Associated Press on Thursday. “Some countries may have more energy than the others, but no country, no country is immune to this crisis.”

The booming stock market hardly seems to be pricing this in. Some analysts describe the disconnect as similar to the way markets reacted during the coronavirus pandemic. After initially plunging, they bounced back quickly — ignoring the lasting damage that had been done to the supply chains that drive world economies, and the steep inflationary risks those disruptions caused. Then came the hangover. As product inventories were exhausted, energy reserves tapped and government assistance for displaced workers depleted, the pain manifested itself in financially punishing aftershocks that ricocheted around the globe.

“People are fooling themselves into thinking this will all be resolved very quickly,” said Emma Ashford, a senior fellow at the Stimson Center, a foreign policy think tank, and the author of a book titled “Oil, the State, and War: The Foreign Policies of Petrostates.” “It is not true. At some point this reality has to snap back together.”

Many connected to the oil industry are puzzled by how cavalierly traders and investors are responding to a global disruption that will not be remedied quickly, regardless of what diplomatic breakthroughs happen in coming days. And they say Iran’s announcement that the Strait of Hormuz — a global choke point for about 20 percent of the world’s oil and natural gas — would be conditionally reopening is an incremental step, not the breakthrough lower oil futures suggest. Iran made clear it will only be permitting ships to pass through selectively and on certain routes. The narrow strait is still littered with mines. The U.S. is not lifting a military blockade of shipping traffic. [Continue reading…]

Earlier this month, CNN reported:

One month into the war in Iran, a growing shortage of crude oil is threatening to morph into something worse: a shortage of nearly everything.

The conflict in the Middle East has crimped oil and natural gas flows through the Strait of Hormuz, reducing global supply by about one-fifth. The disruption has not only sent fuel prices soaring, but has squeezed supplies of petrochemicals needed to make everyday items like shoes, clothing and plastic bags.

That strain is now spreading into every corner of the consumer market as prices rise for materials like plastic, rubber and polyester. The impact is so far most evident in Asia, which accounts for more than half of the world’s manufacturing and is heavily reliant on imports for oil and other commodities.

In South Korea, where people have been panic-buying trash bags, the government has encouraged event organizers to minimize use of disposable items. Taiwan has started a hotline for manufacturers that have run out of plastic, while its rice farmers told local media they may hike prices because they can’t get vacuum-sealed bags.

In Japan, the oil crisis has sparked fears that patients with chronic kidney failure won’t be able to get treatment due to a lack of plastic medical tubes used in hemodialysis. Malaysian glove manufacturers say a dearth of a petroleum byproduct needed to make rubber latex is threatening global supplies of medical gloves.

“This spills into everything very, very quickly: beer, noodles, chips, toys, cosmetics,” said Dan Martin, co-head of business intelligence at Dezan Shira & Associates, an advisory firm that helps international businesses expand in Asia.

That’s because plastic caps, crates, snack bags and containers are becoming more difficult to procure. Petroleum derivatives are also needed to make adhesives for footwear and furniture, industrial lubricants for machinery and solvents for paints and cleaning processes, Martin added.

“It’s very fast transmission from oil and shipping disruption into petrochemicals and consumer goods,” he said. [Continue reading…]