Analysis of the Israel-Iran War and Impact on the Markets

By the Curmudgeon with Victor Sperandeo

No End in Sight:

Israel’s Operation Rising Lion strikes against Iran are expected to take “weeks, not days” and is moving forward with implicit U.S. approval, according to White House and Israeli officials. The justification for Israel’s pre-emptive strike on Iran was to completely shut down Iran’s nuclear enrichment program which is an existentialist threat to the Jewish state.

“We struck at the heart of Iran’s nuclear enrichment program,” Prime Minister Benjamin (Bibi) Netanyahu said in remarks on Friday. He disclosed an attack on the nuclear facility at Natanz, targeted strikes on nuclear scientists working on weaponization, and attacks on Iran’s ballistic-missile program.

Netanyahu told Fox News on Sunday that he launched airstrikes against Iran to prevent “a nuclear holocaust,” claiming his government had intelligence that Iran was months away from developing an initial nuclear weapon.

“We had to act,” Netanyahu told Fox’s Bret Baier on Sunday. “It was the 12th hour, and we did act. To save ourselves but also … to protect the world from this incendiary regime.”

“The intel we got and we shared with the United States was absolutely clear: That they (Iran) were working in a secret plan to weaponize the uranium, they were marching very quickly, they would achieve a test device and possibly an initial device within months, and certainly less than a year,” he said.

Bibi added that Israel saw enough enriched uranium for nine bombs. “All they had to do was weaponize them. We stopped that.”

Confirmation from International Atomic Energy Agency:

Israel’s intelligence was consistent with the International Atomic Energy Agency (IAEA) [1.] Board of Governors resolution to condemn Iran for violating its obligations under the Nuclear Non-Proliferation Treaty on Thursday. It follows serious IAEA warnings that inspectors have been unable to determine whether Iran’s nuclear program was “exclusively peaceful” – as per the terms of the 2015 nuclear deal from which the United States subsequently withdrew.

The IAEA’s recent report documents 20 years of deception by the Islamic Republic about its nuclear program.

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Note 1. The IAEA is a quasi-UN agency that works to prevent the proliferation of nuclear weapons. The nuclear watchdog’s vote to condemn Iran was 19-3-11.

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Netanyahu said that Operation Rising Lion will continue “for as many days as it takes” to remove the threat Iran poses to Israel’s survival.

A map of Iran with red dots

AI-generated content may be incorrect.

Image Credit: NY Times

Destroying Iran’s Nuclear Sites will be a Challenge:

Israel will need U.S.-made heavy bunker-busting bombs, and the strategic bombers required to deliver them in order to reliably destroy Iran’s most fortified nuclear sites, such as Fordow and deeply buried sections of Natanz. Fordow is built deep inside a mountain and is engineered to withstand conventional air strikes. Israel currently lacks the munitions and aircraft that could penetrate and destroy such a facility.

Military analysts suggest that Israel could attempt to replicate the effect of a massive bunker-buster by repeatedly bombing the same location, but this method is less certain and carries significant risks, including the potential for a radiological incident if the site contains highly enriched uranium. Moreover, Israel’s air force would face operational challenges in penetrating Iran’s airspace and sustaining repeated, precise strikes on deeply buried targets without suffering heavy losses or triggering broader escalation.

The consensus is that without U.S. assistance, Israel may be able to degrade and delay Iran’s nuclear program by targeting less-protected sites, infrastructure, and personnel, but it cannot guarantee the destruction of Iran’s most critical and deeply buried nuclear facilities.

Also, Iran has among the largest 20 armies in the world, with almost one million military men in service or reserve duty. That gives it a significant advantage in territorial defense, especially against a ground invasion. If Israel were to attempt a ground invasion of Iran, the sheer size of Iran’s territory, its mountainous geography, and its large (if less advanced) military would make such an operation extremely challenging and costly.

Especially after its disastrous invasion of Gaza (with over 55,000 Palestinians killed), Israel should NOT attempt a “boots on the ground” invasion into Iran.

Impact on Oil Markets:

As expected, oil prices surged, stocks dropped, and investors flocked to safe havens like gold on Friday as a result of the Israel-Iran conflict. Spot U.S. crude oil was up +7.26%, settling at roughly $72.98 per barrel Friday. Brent gained 7%, settling at around $74.23 per barrel.

“The increase in oil prices indicate immediate supply concerns and a growing sense that negative headlines could extend the timeline for escalation unlike the prior Israel-Iran episode,” Ahmad Assiri, research strategist at Pepperstone, a financial services firm, wrote in a research note to clients.

As we’ve noted in numerous Curmudgeon/Sperandeo blog posts, Iran controls the Strait of Hormuz where approximately 20% of the world’s oil passes. That’s ~20M bbl/day of oil, condensate and fuel. If it were closed by the Islamic Republic, oil prices would rise significantly.

Victor previously in this geopolitical Curmudgeon post: “If Iran were to close the Strait of Hormuz, oil prices could soar to $150 a barrel. That would mirror the “Arab Oil Embargo,” when Arab members of OPEC….”

However, analysts don’t think Iran will close the Strait. "Iran's economy heavily relies on the free passage of goods and vessels through the seaway, as its oil exports are entirely sea-based. Finally, cutting off the Strait of Hormuz would be counterproductive to Iran's relationship" with China, J.P. Morgan analysts said.

"It is our understanding that it would be extremely difficult for Iran to close the strait for an extended period given the presence of the U.S. Fifth Fleet in Bahrain," RBC Capital Markets' head of global commodity strategy Helima Croft wrote in a note to clients.

Victor’s Comments:

Israel’s urgent need to stop Iran from making a nuclear weapon is completely justified to prevent the annihilation of the Jewish state by the Islamic Republic. If it succeeds, Israel will be doing the world a favor in preventing a nuclear war.

The U.S. has tried to stop Iran’s nuclear program via talks in Oman that have now been suspended. Evidently, Iran does not want peace with Israel or the nuclear deal that President Trump has pushed so hard for. Instead, the Islamic Republic seems firm in its intent to destroy the Jewish State as they believe Israel is their forever enemy.

What it means to the markets will be dependent on the actions of several nations, including China, Russia, and the US. No soothsayer can predict the outcome at this time.

Due to tremendous geopolitical uncertainty, it’s now prudent to have a 50%/50% position in Gold and T- Bills for the short term.

A Lesson from Sun Tzu's The Art of War:

The "Art of War" by Sun Tzu, an ancient Chinese military treatise, is relevant to analyzing the Israel-Iran war because it offers enduring strategic principles that can be applied to understand the dynamics and decision-making of each side of the conflict.

“All warfare is based on deception” is a fundamental principle of The Art of War. It emphasizes that military success relies on manipulating the enemy’s perception and expectations, rather than simply overpowering them with brute force. Deception can involve feigning weakness when strong, appearing distant when near, or luring the enemy into a trap.

Israel's "Operation Rising Lion" demonstrates the concept of strategic surprise, even when general intentions were known. This aligns with Sun Tzu's emphasis on achieving strategic surprise, not just tactical surprise, by concealing capabilities and timing.

Stay calm, be healthy, successful and good luck. Till next time……….

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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