How Gulf Markets Are Reading the Iran War Differently From New York — and Who Might Be Right

There is a certain, difficult-to-describe silence when you stand in the lobby of any major bank in downtown Dubai. Not the silence of serenity, but rather the silence of people carefully selecting their words. Numbers that would have seemed unattainable a few months ago flicker on screens. The Iran war, which is currently in its second month, has produced two completely different financial realities depending on which side of the Atlantic or Persian Gulf you happen to be standing on. This is something that decades of geopolitical theory have never fully captured.

New York is anxious. The Gulf is more akin to being concerned. Furthermore, the gap between those two emotional registers may reveal more about the direction of this crisis than any analyst note released this week.

The S&P 500 has dropped by roughly 4% since the start of US and Israeli strikes on Iran in late February. That sounds awful until you contrast it with the Nikkei in Japan, which has lost more than 12 percent, or the STOXX 600 in Europe, which has lost 9 percent. Relatively speaking, American stocks have maintained their position with a tenacity that, depending on your point of view, can be either praiseworthy or concerning. In short, the US can absorb more economic impact than most other regions of the world, according to Yung-Yu Ma of PNC Financial Services Group. Most likely, he is correct. However, increasing absorption does not equate to decreasing absorption.

America’s relative cushion is due to structural factors. The Hormuz stranglehold, which has slowed about 20 million barrels per day to what experts are now calling a trickle, affects the US differently than it does Seoul, Tokyo, or Frankfurt because it is the world’s largest oil producer and a net exporter. Only 4–8% of US oil passes through the Strait, according to the BlackRock Investment Institute. In a Gulf boardroom, where the entire region’s economy was literally built around those waters, that figure looks very different.

The direct Iranian attack on Qatar’s Ras Laffan Gas Facility altered the balance of power in the region. Infrastructure wasn’t the only issue. No amount of hedging techniques or sovereign wealth fund reserves can completely offset the psychological impact of a targeted Ras Laffan, which is the beating heart of a whole country. Gulf markets are pricing existential proximity in addition to energy disruption. That is a completely different asset class.

One of the most astute commodity experts working today, Ed Morse, was direct about the true significance of the strategic stockpile releases: the math is flawed. Prices hardly flinched when the IEA organized the biggest release of strategic reserves in history, totaling 400 million barrels. Morse contends that this is because the stocks being released aren’t of the proper quality, don’t have the right product mix, and aren’t able to close the precise gap that a closed Hormuz creates. The crude slate that is available outside of the Gulf won’t generate enough distillates to address the current spike in jet fuel and diesel. It’s not a solution; it’s a mismatch. One of those situations where you genuinely wonder if anyone in charge truly understood what it would be like to close this specific strait is when you watch policymakers use a blunt instrument against a precision problem.

Conversations coming out of Abu Dhabi and Riyadh give the impression that Gulf investors feel somewhat left out of the diplomatic framework they believed they were a part of. For years, Oman had been acting as a covert mediator between Tehran and Washington. Hostage releases were made possible by Qatar’s maintenance of back channels. In order to mend its relationship with Tehran, Saudi Arabia had taken cautious, cautious steps that required a significant amount of domestic political capital. Now, all of that patient construction is in ruins. The geographical fallout for Gulf states is that, once this is over, they will be in the same neighborhood as whatever Iran turns into. Investors in New York do not have to make that specific long-term calculation.

An additional layer of anxiety is added by the Houthi question, which Western market analysis fails to fully account for. In addition to the disruptions already caused by Hormuz, an additional 12% of international seaborne oil transits are at risk if the group resumes its attacks on Red Sea shipping. A second front opening in Yemen is a memory rather than an impersonal danger for Gulf states. The speed at which “contained” turns into “catastrophic” in that body of water is evident to anyone who witnessed the initial Houthi shipping campaign.

It’s difficult to ignore the fact that Wall Street’s relative tranquility is based on presumptions that seem more tenuous the closer you get to the real geography. It would be incorrect to ignore the fact that the US services economy, the strength of the dollar, and domestic energy production all contribute to genuine insulation. However, there is a distinction between immunity and insulation, and markets occasionally conflate the two until they are unable to do so. The Gulf is already aware of its position on that line. New York has yet to make a decision.

Who is accurately interpreting this war? Most likely both, in their own contexts, and that’s exactly what makes the divergence so unsettling. The assumption of American insulation is put to the test in ways that a 4 percent S&P decline hasn’t started to reflect if Gulf markets are correct that this continues and intensifies. The Gulf’s alarm will appear to be an overreaction if New York is correct and a deal is reached and flows resume. In any case, there is a serious mispricing. The Strait of Hormuz has the ability to quickly give abstract financial arguments a concrete feel.