The Middle East situation has become chaotic, with crude oil prices surging to around $120 and the Nikkei average temporarily falling by 4,000 yen. Markets have begun to price in the risk of prolonged conflict with the US and Israel after Iran elected Ayatollah Mojtaba, the second son of the slain Supreme Leader and the most hardline figure, as its next Supreme Leader. Crude oil prices have risen to $119.
This is driven by the growing possibility that the conflict between the U.S., Israel, and Iran could last longer than anticipated. Iran has been intermittently launching drone attacks, targeting oil-related facilities in the Gulf. Rising crude oil prices fuel inflation, forcing countries to tighten monetary policy. Growth rates decline. U.S. consumers are dissatisfied with rising prices, and the midterm elections appear to be tilting in favor of the Democratic Party.

In Japan, oil wholesalers have confirmed requests to the government to release strategic petroleum reserves. Though only days have passed since the Strait of Hormuz blockade began, supply concerns are already emerging. However, the Bank of Japan remains committed to its rate hike path despite heightened uncertainty in domestic and global economies stemming from the escalating Middle East situation, and does not rule out the possibility of needing to raise rates in April.

Iran cannot defeat the US in war, but it hopes that by continuing the strait blockade, it can drive up oil prices, increase inflation rates, and heighten criticism of the US. In that case, safe-haven dollar buying could strengthen. However, crude oil prices softened in the afternoon session today following a Financial Times report that the G7 is considering coordinated releases of strategic oil reserves, leading to a risk market rebound.
That said, unlike coordinated currency intervention, this merely involves selling oil using “finite” reserves. Its limited effectiveness is clear. We’ll look to buy dips in crude, sell stocks on rallies, and continue buying dips in USD/JPY.