June 23 – Wall Street remains on watch this morning after the United States directly interjected itself into the conflict between Iran and Israel, although investors are handling it relatively well to this point. Stock futures are only modestly weaker this morning, while the VIX is only modestly higher near 21. The dollar index is trading near 99.2. Yields on 10-year Treasuries are trading near 4.36%, while yields on 2-year Treasuries are trading near 3.90%. Crude oil prices are trading modestly higher, but that’s roughly $4 off their session high as fears ease. The grain and oilseed markets are mostly weaker, which has become a common theme of late on Monday trading sessions.
The United States made a precision strategic strike on three key nuclear facilities in Iran on Saturday evening, Washington time, causing extensive damage to all three facilities. It will likely take some weeks to fully assess the damage done to the facilities, but the initial assessment suggests that Iran’s nuclear program has been dealt a severe blow. No offsite releases of radiation have thus far been detected, according to the International Atomic Energy Agency. The strike included 14 GBU-57 bunker-busting bombs weighing 30,000 pounds each targeting the two underground facilities, along with more than two dozen tomahawk missiles to finish the job. The United States carried out the surprise attack without a single known shot being fired, or without a single Iranian military aircraft leaving the ground. President Trump gave a brief statement to the nation telling of the strike on Saturday night, followed by a more detailed press conference to describe the operation by both Defense Secretary Pete Hegseth and the Joint Chief of Staffs General Dan Caine on Sunday morning.
President Trump warned Iran against retaliating against any U.S. persons or interests. Iran promised retaliation, and it did send more missiles into Israel – but for now there is hope that Iran’s retaliation will be measured so as not to trigger a larger response by the United States against its oil interests. President Trump made it clear that our issue is not with the Iranian people, but rather it is with Iran’s nuclear program. Iran’s regime likely feels that it needs to respond to save face with its followers, but the hope is that it does so in a way that doesn’t escalate the situation. Let’s be clear – the U.S. strike on Iran was a high-risk operation. It could result in widespread peace breaking out in the region in the months and years ahead, or it could dramatically escalate the conflict into a regional, or even global problem. Iran’s regime is intimately involved with Russia and China. The U.S. strike on Iran removes the leverage of a potential nuclear strike that it held over much of the world.
Iran’s parliament reportedly made the decision to close the Strait of Hormuz – that narrow passage between it and Oman through which oil tankers carry roughly 20 million barrels per day, but doing so is up to the supreme leaders. Iran has made similar threats over the past four decades plus, but it has never succeeded in fully closing the Strait. Some of that oil could be moved via two pipelines to other offloading locations with a combined capacity of 6.5 mbpd, although roughly 1 mbpd of that capacity is already being used. Nonetheless, the United States has sufficient military assets in the region that it would likely quickly get involved in directly protecting tankers moving through the Strait. Oil is the energy that fuels Iran’s economy, so it has been quietly moving oil into floating storage – tankers sent into the Indian Ocean – that it can continue to sell on the global cash market to finance its operations. China is the largest buyer of Iranian oil, although its purchases have slowed of late as President Trump has increased enforcement of sanctions against Iranian oil. Israel and/or the United States could very easily take out Iran’s energy assets, as they have done to its nuclear capabilities. Both want to avoid doing so, because both hope that one day Iran’s people can be ruled by a peaceful regime as they were prior to 1979, and they do not wish poverty on the region. But that is a threat that both hold over Iran as they try to get Iran to the negotiating table.
Global fertilizer supplies are currently receiving little focus, but they should. Global nitrogen supplies are currently growing tighter due to geopolitical challenges. Ukraine hit one of Russia’s largest nitrogen fertilizer plants earlier this month, putting it out of commission for an unknown length of time. Iran is the world’s #3 exporter of urea nitrogen fertilizer, at 4.5 million metric tons. Much of that was shut down after Israel struck the South Pars natural gas field – utilized to produce the fertilizer – in the early stages of this war. Qatar is across the Persian Gulf, and it is the world’s #2 exporter of urea fertilizer at 5.2 mmt. It’s production has not been impacted at this time, but it’s ability to export the urea would be impacted if the Strait of Hormuz is shut down. Egypt is the #3 exporter of urea at 4.3 mmt. It's production was shut down when Israel pre-emptively shut down its gas fields that provided feedstock to Egypt’s fertilizer production facilities. Oman and Saudi Arabia are #5 & #6, and their output is also at risk – especially Oman. Most at risk currently are supplies for the upcoming Southern Hemisphere growing season, including the critical Brazil market.
