Oil Slides, But the Geopolitical Risk Premium Isn’t Gone

Grant Calloway

So, overnight, the oil market basically fell out of bed. Brent crude dropped six point seven percent to slide below ninety dollars a barrel, and WTI tumbled six point one percent to eighty-four dollars and twenty-five cents. And, uh, if you are looking for the why, it is pretty simple on paper. We have had three consecutive days without any direct U.S. or Iranian military strikes. It is the, the, the first real lull in hostilities we have seen after nearly two weeks of nightly bombing. But, honestly, before anyone pops the champagne and buys the dip on tech index funds, we need a major reality check here on what is happening in the physical world. Despite this big slide in futures, maritime traffic in the Middle East is still completely paralyzed. We are talking about fewer than ten commodity ships traversing the Strait of Hormuz over the weekend. Compare that to a pre-war average of over one hundred ships per day. Ten. That is not a functioning shipping lane. And, oh, by the way, Houthi forces still claimed drone attacks on Saudi Aramco facilities at Jizan and Yanbu over the weekend. So, this idea that we have suddenly entered some era of peaceful trade, it is just a fantasy. This pause is incredibly fragile.

Grant Calloway

But, you know how the equity market works. Any excuse for a relief rally. This morning, S&P futures are up zero point eighty-eight percent, and Nasdaq futures are pointing to a one point thirty-seven percent tech bounce. We are seeing the geopolitical risk premium deflate, at least for a few hours. Even the ten year Treasury yield is slipping slightly, down to four point sixty-four percent. It gives the bulls some temporary breathing room right as we head into this massive tech earnings week. But, look, I, I, I spent years on the NYSE floor, and I remember trading the nineteen ninety Gulf oil shocks. I can tell you exactly how the crowd on the floor reacts to this stuff. When you get a pause like this, the algorithms and the momentum traders treat it like a permanent peace dividend. But the guys who have been around the block know the difference between a temporary lull and a formal treaty. Treating this ninety-six hour pause as a green light to ignore geopolitical risk is, well, it is a dangerous assumption. One errant strike, one drone hitting the wrong target, and crude instantly rips right back to triple digits.

Grant Calloway

Now, adding fuel to this fire, we got the economic data at eight thirty AM Eastern. Preliminary June Durable Goods Orders came in significantly weaker than expected, growing only zero point three percent against the one point six percent consensus expectation. This is a big miss, and it shows the underlying economy is cooling. But in this weird market environment, bad news can be good news, right? This soft print, combined with lower energy costs, reloads the gun for Wednesday's pivotal Fed meeting. Right now, traders are pricing in a thirty-five percent probability of an immediate rate hike at next week's meeting, so this data is going to be heavily scrutinized.

Grant Calloway

If you look at the pre-market movers, you can see this macro shift playing out in real time. First, the airlines and consumer discretionary stocks are moving up on lower fuel costs. United Airlines, ticker UAL, is up three point seventy-six percent to one hundred twenty-two dollars and seventy-one cents. General Motors, GM, is up three point thirty-six percent to eighty-five dollars and forty-two cents, also getting a boost from a fresh Jefferies upgrade. Then you have the yield-sensitive utilities absolutely surging as yields pull back. Pinnacle West, PNW, is gapping up ten point fifty-five percent to one hundred seventeen dollars and twenty-five cents. DTE Energy is up four point zero one percent to one hundred fifty-five dollars and forty-five cents. Meanwhile, the energy sector is bleeding. APA Corporation is down four point forty percent to thirty-four dollars and fifty-six cents. Occidental Petroleum, OXY, is down three point sixty-four percent to fifty-five dollars and twenty-one cents. And Exxon Mobil is down three point thirty-one percent to one hundred fifty-one dollars and seventy-five cents.

Grant Calloway

So, here is the big debate. The Bull case is that cooling durables and dropping oil will force the Fed to back off their hawkish rhetoric, deflating that thirty-five percent chance of a hike and clearing the runway for Microsoft, Meta, and Amazon earnings. The Bear case, which, quite frankly, I lean toward, is that the economy is visibly slowing while tech capital expenditure remains insanely high. If earnings miss, there is zero margin for error, especially if those oil pipelines get shut down again.

Grant Calloway

Before we head out, a quick shout-out to our sponsor, Jellypod, at jellypod.com, the best place to get hyper-focused, fluff-free morning market briefings. Tonight after the close, watch out for Nucor. They are expected to report adjusted Q2 earnings of four dollars and fifty cents to four dollars and sixty cents per diluted share. We also have Cadence Design Systems reporting. Just a quick reminder, this podcast is for educational purposes only and does not constitute investment advice. Alright, let us see what happens when the bell rings. Talk soon.