MIDDLE EAST WAR UPDATE: INFINITYHEDGE

Israel, US, Iran are widening targets to non-military infrastructures

U.S. & Israel:
- burning ~$1b/day
- discussing deployment of forces on ground to seize Iran's uranium
- considering 3rd aircraft carrier to deploy in region
- targeted more sites including major israeli strikes on oil depots in iran

Iran:
- said it will continue its attacks on U.S. sites in neighboring countries
- targeted THAAD radars: 4 AN/TPY-2 damaged/destroyed per CNN: 2 in UAE, 1 in Saudi Arabia, 1 in Jordan; each costs ~$500M & described as "the heart of the THAAD battery"

Other:
- EU states warned of a global interceptor shortage
- All Major Media reports that investigations points to likely US responsibility in Iran school strike that killed girls

Gulf Countries:
- intercepted more drones/missiles in multiple waves all week
- UAE President in rare public comment confirmed UAE is "in a time of war"
- unofficial reactions: This is Netanyahu's war...This isn’t the Gulf’s war & we shouldn’t fall for the Israeli bait the way the US did

Water infra precedent:
- US allegedly struck a freshwater desalination plant in Iran, cutting water supply to 30 villages; Iran's FM said that US set this precedent, not Iran
- ~100M people across the region dependent on desalination facilities

Hormuz:
- stil effectively closed, only Iran-linked sanctioned tankers crossing; Just 9 empty supertankers remain available in the Persian Gulf, once loaded, there is no buffer left; the next forced production shutdown phase could begin within days
- Iraq Oil Output Plunges About 60%; UAE, Kuwait Start Oil Output Cuts; Saudi Arabia raised prices
- U.S. steps to ease prices so far: (1) General license for Indian refiners to buy Russian oil at sea; (2) Bessent: "We may un-sanction other Russian oil; (3) $20B DFC reinsurance, experts say all three are "marginal" without reopening Hormuz; shipowners say crew safety, not insurance, is the real barrier; industry consensus: naval convoys may just "put a target on ships' backs"
- Ships declaring themselves Chinese to dodge attack; China has told major refiners to suspend exports of diesel & gasoline
- Japan reportedly considering tapping national reserves
- EU diesel futures up 50%+ in one week, biggest weekly move on record; jet fuel exceeded $200/barrel; LNG Asia Pacific shipping rates up 529%; Japan/Korea LNG up 106%

Inflation:
- GS: If oil prices increase by $10 & remain elevated for 3 months, US yoy headline CPI inflation would likely rise from 2.4% in Jan to 3% in May
- JPM: each 10% increase in oil..translate to a ~10bp gain in headline PCE inflation & a 15-20bp drag on GDP growth

Outlook:
- GS: if Hormuz stays blocked through March, oil prices could exceed the 2008 peak of $147 & $200 now described as "no longer unthinkable" by the FT: infinity-hedge

S&P Credit Scenarios:
- Low-moderate (~2 wks conflict): Brent $75–85/bbl; 30–70 bps risk premium; temporary disruption; no banking stress
- Moderate-high (~1mo): Brent $85–100/bbl; 15% of global crude + 20% of LNG trade affected; 100–150bps premium; capital outflows from regional banking system
- High credit impact (>1 month): Brent sustained above $100/bbl; storage challenges + production shutdowns amplify price further; 250–500bps risk premium; deposit outflows, asset quality stress, governments unable to backstop banks

Russia: oil & gas revenues had declined ~25% in the prior year, Hormuz closure has reversed this entirely. US issued a waiver allowing India to buy Russian crude, creating the extraordinary situation of a wartime US president subsidizing Russian energy revenues to manage a crisis his own war created: infinityhedge