Ambrose Evans-Pritchard
Four powerful shocks are hitting the world economy at the same time. They are escalating and feeding on each other, driving a commodity spiral that can end only in an inflationary blow-off.
The effects are ripping through the global bond markets and confronting central banks with an impossible dilemma. Yields on 10-year US Treasuries have surpassed 5 per cent, smashing through the Maginot defences of Scott Bessent, the US treasury secretary.
The Bloomberg commodity index has risen 48 per cent this year, accelerating in pace and spreading in breadth from energy to industrial metals and grains. The fever has spread to shipping and freight.
Lloydโs List says the cost of a giant VLCC oil tanker on the Baltic Exchange has hit $US1 million ($1.4 million) a day, eight times the cost in January. โWhat is happening is truly unprecedented,โ said Erik Broekhuizen, the head of shipping at Poten & Partners.
The futures markets are no longer pricing in a quick return to normal, as they were in those first insouciant weeks of the Iran war, when traders still believed in the all-conquering might of the US navy. Brent futures contracts are more than $US90 a barrel all the way out to the spring of 2027.
European gas futures are locking in prices through the winter that are three times higher than last winter. Wheat, maize and soybeans are all in โcontangoโ: futures prices are well above todayโs spot prices.
The first two horsemen of this โapocalypseโ โ conquest, war, famine and death in the Book of Revelation โ are the twin wars in Iran and Ukraine, both acts of aggression by atavistic old men who fatally misread their own strength. These two conflicts are convulsing the worldโs interlinked petroleum, gas and grain markets in complex ways.
The easy part to understand is that Donald Trumpโs war has again pushed Brent crude to $US108, and pushed Murban crude for the Asian market to $US127. This was predictable.
It was always likely that Iranโs revolutionary guards would match every stage of Trumpโs escalation with counter-escalation, gambling that it could endure the pain longer than he could sustain an unpopular war, one that is fast eviscerating US global credibility. If Iran cannot export oil, nobody in the region can export oil.
The US lacks the military means and policy coherence to stop the regime carrying out this threat; it lacks the interceptors needed to keep defending its own ships and bases and the Gulf economies โ at least not without depleting its munitions to levels that endanger US security in the Pacific.
The pro-Iran Houthis in Yemen can smell weakness and have closed the trap by seizing the lower coastline of the Red Sea and all but blocking the Bab el-Mandeb Strait to Saudi tankers. Trump has tried to dodge the issue by saying the Houthis are not his problem, to the point of turning down an urgent Saudi request for help, but the Houthis are his problem.
Iranian-controlled militias in Iraq have iced the cake by bombing the Saudi East-West pipeline, until now the conduit for Aramco oil circumventing Hormuz. We now go into another leg of this oil squeeze with buffers exhausted and operating inventories below the safe floor. US commercial stocks at Cushing are touching โtank bottomโ at 22 million barrels. The scale of strategic failure is breathtaking to behold.
Less obvious is how Vladimir Putinโs war amplifies the Mid-East shock. The Ukrainians have learnt how to knock out Russian refineries with precision drone attacks on the highly engineered distillation towers that are hardest to fix.
A third of Russiaโs refining capacity is out of action, forcing Putin to suspend exports of petroleum distillates. Russia is now importing diesel from India, competing for supply on the world market.
The effects are ripping through the global bond markets and confronting central banks with an impossible dilemma.
Most of the Gulfโs refineries are also bottled up on the wrong side of Hormuz. Some 7 per cent of world capacity is offline across the two theatres.
The headline price of oil drastically understates the gravity of what is happening.
The stress has switched to diesel, petrol and jet fuel, the products that we consume and that matter for inflation. The diesel โcrack spreadโ in New York has quadrupled to levels never seen before, tantamount to oil at $US190.
US diesel at the pump has risen over the last year from $US3.72 to $US6.23 a gallon. It is diesel that powers tractors, combine harvesters and the global farm economy, as well as trucking, construction and much else besides.
The diesel horror story will lead mechanically to less planting on marginal loss-making fields, compounding a food shortage in 2027 already building up for other reasons. Drone and missile attacks have cut off two-thirds of grain shipments from the global breadbasket of the Black Sea region. Putin is actively attacking grain silos and warehouses.
The third horseman is the super El Nino welling up in the warm waters of the Pacific. A study in the science journal by Dartmouth academics concluded that the El Nino event of 1997-1998 led to global income losses of $US5.7 trillion through a domino chain of complex effects.
This El Nino looks stronger. The world enters this episode with lower food stocks, after the European and US droughts, and against a new political backdrop of Hobbesian resource nationalism and state-food hoarding. Insurers Allianz say it is the policy reflex โ not El Nino itself โ that threatens the largest damage.
Extreme weather is why the water gauges on the Rhine fell to an all-time low in August, paralysing 80 per cent of Germanyโs inland shipping.
It is why 19 nuclear reactors on the Danube, in France and in Switzerland, had to shut down or sharply curtail output, compelling Europe to burn more gas over the summer, instead of refilling depleted inventories.
Meteorologists fear that the next shoe to drop will be havoc in the hydropower networks so critical to the electricity supply of China, India, South-East Asia and Latin America. That, too, will drive coal and gas prices higher.
The fourth horseman, of course, is the investment blitz in AI, advanced chips and data centres, along with the electrical infrastructure, transformers, substations and gas turbines needed to sustain this $US20 trillion nexus, leaving aside the little matter of whether it will soon annihilate humanity.
In the long run AI will be deflationary. Today it is inflationary, devouring energy, copper, water and resources of every kind, and sucking up much of the available capital needed to fund the fiscal deficits of America, Japan and Europe.
At some point, perhaps within months, perhaps not for another year or two, the wars will peter out and oil will flood back into the market. El Nino will peak in November and will be over by mid-2027.
Exasperated citizens will rein in Silicon Valley and drastically ration data centres. Cut-throat competition from cheaper Chinese AI start-ups will stop OpenAI or Anthropic generating anything close to the revenues that the market now supposes. The US bubble will burst and trigger a recession, causing both bond yields and oil demand to plummet.
But before the Westโs democracies have to deal with that mess, they will first have to deal with the four horsemen riding knee-to-knee, and we seem to be in no fit state to handle the challenge. Rarely have I felt such deep foreboding heading into winter.
Telegraph, London
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