At 6:00 when the market opened, the world lost its rationality

Source: Wall Street Intelligence Circle

——In this environment of "sharp drops paired with sharp rises," forced liquidations of leveraged funds may trigger the next wave of irrational sell-offs.

With the situation in Iran escalating, oil prices broke through $100 as soon as the market opened (UTC+8 6:00), and at one point surged to $110—countless were shocked and terrified, as if the global market had lost all rationality.

The financial market once again experienced the classic scenario of "oil and the US dollar rising, everything else falling." However, the declines this time were much steeper, corresponding with the dramatic rise in oil prices.

The current momentum shows no signs of stopping; although oil prices have pulled back slightly, the dollar and US Treasury yields remain near the day's highs, while gold and US stock futures are hovering near their daily lows—this suggests the situation may become even more challenging. The South Korean stock market could face a new round of significant declines.

The market is panicking now, but it has not yet reached full-blown panic. Many traders are still assuming that the war will cool down quickly. If this assumption is broken, the market could enter a second phase, at which point volatility may increase significantly.

The situation still appears to be severe:

Iran has announced that the son of the assassinated Supreme Leader Khamenei will assume his position—taking power after his father’s assassination and while the country is on the brink of war leaves him zero room for compromise; he must establish his legitimacy through a tough stance. This means that any hope of easing the “Strait of Hormuz blockade” through diplomatic channels in the short term is virtually zero.

According to The New York Times, the US has already ordered its diplomats to leave Saudi Arabia—essentially meaning that America has lost control over the situation.

On one hand, countries such as Kuwait and the UAE have begun to implement genuine production cuts. On the other hand, oil infrastructure has been damaged.

This current shock to oil supply could be even more severe than the two previous well-known oil crises.

· 1990 Gulf War: Iraq invaded Kuwait, causing Kuwait’s oil exports to virtually disappear, and Iraqi oil was sanctioned as well. The market suddenly lost about 4 million barrels per day of supply. Oil prices nearly doubled within months—this was the first real energy crisis after the Cold War.

· 2022 Russia-Ukraine war: The shock was even more complex, as Russia is one of the world’s largest energy exporters. After the war broke out, several things happened: the West sanctioned Russian oil, Europe scrambled to find alternative energy sources, global oil shipping routes were reconfigured, and oil prices at one point surged to $130.

This time, "it could be even more severe," because the world is still highly dependent on Middle Eastern oil—one-fifth of the world’s oil passes through the Strait of Hormuz. If the blockade continues, $100 may only be the starting point, and some extreme predictions now look toward $130–$150.

Moreover, the current market structure is even more fragile than before, with much more leverage. If oil prices fluctuate sharply, it may trigger forced liquidations and a liquidity crisis. This is why some analysts have recently started using a new term: systemic shock.