LIVE MARKETS-Potential US-Iran conflict may be completely underpriced

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POTENTIAL US-IRAN CONFLICT MAY BE COMPLETELY UNDERPRICED

On Tuesday, Iran partially and temporarily closed several sections of the Strait of Hormuz for several hours during Revolutionary Guard military drills.

As Ben Emons, founder of FedWatch Advisors, sees it, markets view this risk as an “Iranian bluff.” Tuesday's closure affected shipping lanes but did not fully block the strait or halt global oil flows.

Meanwhile, with the S&P 500 .SPX sitting down around 1.6% from its January 27 record closing high, oil prices have been buoyed by the concerns over a potential U.S.-Iran conflict.

According to Emons, Brent crude is highly sensitive to oil flows from the Strait because 80% of the 16 million to 20 million barrels/day that pass through go to Asia, with the remainder going to Europe and the U.S. (which gets about 3% to 5% of its oil from the Strait).

Emons says that Iran itself ships ~1–1.5 million barrels/day through the Strait of Hormuz, which is roughly half of its estimated daily production of 3.2 million barrels/day. So, Emons believes Iran could be bluffing if it pursues a full shutdown of the Strait in a military strike, as such a strike would be a serious blow to Iran’s economy.

"The history between the US and Iran is fraught, and these talks are more fragile than what is currently priced into broader markets. The warning by Iran’s supreme leader, Ali Khamenei, 'more dangerous than the American warship is the weapon that can send it to the bottom of the sea,' is stronger than a bluff and a sign that Iran is ready to immediately strike if the US moves first," writes Emons in a note out late Wednesday.

Emons says that in 2022, U.S. Central Command estimated Iran had more than 3,000 ballistic missiles. After heavy use in conflicts with Israel (2024–2025), he says Israeli officials estimated Iran had ~1,500 missiles and 200 launchers remaining, but Iran is actively rebuilding its stockpile.

"Iran’s missile program includes short‑, medium‑, and near‑intermediate‑range systems, with a self‑imposed range cap of 2,000 km (1,240 miles). This range is explicitly designed to reach Israel and U.S. bases in the region. Hence, Hormuz may be a bluff, but a conflict would be a serious escalation of geopolitical risk, given Iran’s capabilities, and this is completely underpriced in financial markets," Emons writes.

(Terence Gabriel)

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