The US is winning the Blockade War

The US blockade is putting severe strain on Iran without blowing up global markets

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The US blockade of Iran has two goals: (i) put pressure on Iran’s economy to bring the regime back to the negotiating table in good faith; and (ii) do so without destabilizing global markets, including via a sharp rise in oil prices. I first advocated for blockading Iran in a post on March 16, when I argued that risk-reward favored doing a blockade because oil prices had already risen so much, i.e. the main cost of doing a blockade was priced in. I think that’s been broadly borne out by the past three weeks.

In last year’s tariff standoff with China, it was financial markets that were the US’ Achilles heel. The same is true now with Iran. In the first few weeks of the war, there were indications that sharply rising oil prices were destabilizing global markets, with signs of adverse spillovers into private equity. In today’s post, I’ll run through global markets and show that the picture is remarkably calm. That’s testament in my view to how skillful the rollout of the blockade has been. Keeping a lid on volatility is a key ingredient to a successful blockade because it deprives Iran of its biggest offensive weapons: instability and chaos.

My readers will know I think it’s important to compare like for like, so I compare financial markets now with how they behaved after Russia’s Ukraine invasion. The four charts above do this for the July Brent futures price (top left), the S&P 500 (top right), the Dollar versus its G10 peers (bottom left) and the Dollar versus emerging markets (bottom right). The blue line is what’s happening now and the black line is what went on in 2022. In both cases, I’ve indexed things to be 100 the day before war began, which is Feb. 23, 2022, for Ukraine and Feb. 27, 2026, for Iran. What’s striking is how much bigger the oil price shock is now, yet markets are very calm.

The four charts above are my tracking of what’s going on in options markets. They show 30-day ahead implied volatility for crude oil (top left), the S&P 500 (top right), the bond market (bottom left) and the high yield corporate debt market (bottom right). A rise in implied volatility signals increased demand for hedging as markets brace for more uncertainty. We’re clearly not at the kind of distressed levels we were at around three weeks after the start of hostilities.

Now, it’s easy to dismiss these charts as “markets are being complacent,” but I think there’s more to it than that. The US has been skillful at keeping markets calm in the face of all kinds of scare stories, notably this past week as so many were screaming about physical shortages. Between taking Iran’s oil exports down to zero and causing it serious storage and capital flight problems, the US is also winning the standoff in global financial markets, where it’s keeping a lid on volatility. That defangs Iran’s main weapon, which is global markets instability.