In our analyses, we regularly examine current movements, identify possible influencing factors and assess the general market situation. However, these are not recommendations, but merely opinions and food for thought.
Find out more about Pretiorates.com
Pretiorates’ Thoughts – Cracks in the System
The war in Iran shows no signs of abating. And judging by the latest statements and actions of the parties involved, it doesn’t look like peace is just around the corner. Unfortunately.
As a result, oil markets are rising again. Crude has reclaimed the $100 mark, while Brent is even trading at around $107. That’s significantly higher than before—and is slowly returning to a level where not only drivers but also central bankers are nervously watching the gas pump.
Still, considering that the war has been raging since February 2026 and the Strait of Hormuz has been effectively closed ever since, the oil market is reacting with surprising calm. This is because the Brent futures market shows backwardation of no less than 28% for the 12-month contract. The futures contract for delivery in twelve months is thus trading at a price approximately 28% lower than the current spot price. The market’s message is therefore quite clear: in twelve months, the crisis will be over and the Strait of Hormuz will be largely open again.
That’s an extremely optimistic bet, and we’d tend to think the market is assessing the situation too optimistically. Especially since the Iranian regime is once again emphasizing today that it will not yield under any circumstances.
According to various sources, however, evidence is mounting that the Strait of Hormuz isn’t nearly as blocked as is generally assumed. Many tankers are crossing the strait at night with their transponders turned off—in a sort of maritime stealth mode. Analysts at Goldman Sachs and Kpler even estimate that nearly 70% of the volumes originally transported through the Strait of Hormuz are now available again on the global market—either via alternative routes such as pipelines or, in fact, through the strait itself. Combined with the fact that China has significantly reduced its imports since the outbreak of the war, this likely explains why the oil market hasn’t completely skyrocketed so far.
In fact, there appears to be sufficient crude oil available on the global market. Accordingly, there have been hardly any warnings so far that the strategic crude oil reserves of various countries are dramatically dwindling. So the oil supply isn’t the real problem.
The growing problem begins one step further down the chain—at the refineries. Some facilities in the Gulf states have been damaged or partly destroyed, whether by Iranian drones or by U.S. and Israeli attacks on refinery capacity in Iran. And as if the situation weren’t complicated enough, Ukraine has also been deliberately targeting Russian refineries with drones for months. As a result, Russia is exporting fewer refined products—such as diesel, kerosene, and gasoline—to countries like China, which have so far not complied with Western sanctions.
The consequence is simple: these countries are now buying more on the global market. Unfortunately, this very market is already under strain because the Gulf states, too, are unable to supply as many refined products. Repairing damaged refineries is likely to take months, and in some cases, years. On top of that, the usual annual maintenance for many facilities is scheduled after the summer season. So refinery capacity is being lost not only due to missiles and drones, but quite simply because of wrenches and maintenance schedules as well.
The result: The production of refined products has become massively more expensive. This cost difference between a barrel of crude oil and, for example, diesel is known in technical jargon as the crack spread. Historically, this has typically ranged from about 20 to 30 U.S. dollars per barrel. However, with refinery capacity lost worldwide, it has now risen to over 100 U.S. dollars. The price of oil itself hasn’t skyrocketed to the same extent—but the blow is still felt at the gas station. The crack spread is to blame.
While all refined oil products are affected, the significantly higher diesel costs are particularly problematic. Diesel powers trucks, agricultural machinery, construction equipment, mining vehicles, ships, trains, and military vehicles. In other words: Diesel is practically at the table everywhere something is produced, transported, or moved.
Rising diesel prices can therefore hardly be magically eliminated simply by reducing demand. It’s far more likely that the higher energy costs will eat their way through the entire economy via transportation, agriculture, and industry. And that brings us back to the topic of inflation.
Of course, rising government debt is also likely contributing to investors demanding higher yields. What’s striking, however, is that the swap markets are already pricing in interest rate hikes of around 50 basis points by June 2027. The market thus seems increasingly convinced that the inflation problem is not yet resolved.
The yield on 10-year U.S. Treasuries currently stands at around 4.95% and is likely to approach the 5% mark soon—which would probably lead to significantly higher nervousness in the stock market. The yield on 30-year Treasuries is now well above 5.30%—the range that Treasury Secretary Bessent recently described, in essence, as the upper pain threshold. The bond market seems largely unimpressed by this.
Rising government debt and rising interest rates, however, have a particularly unpleasant characteristic: they reinforce each other. The higher the interest rates, the greater the interest burden. The greater the interest burden, the more must be financed. And the more that must be financed, the more bonds end up on the market. It’s a cycle that no one really invited.
Two weeks ago, we already pointed out that the current debt ceiling of 41.1 trillion U.S. dollars could potentially be reached as early as the end of this year or in early 2027. In Congress, the knives are likely already being sharpened—especially depending on the outcome of the midterm elections.
The big question now is how the U.S. government intends to cool down the increasingly hot water—before it boils over. Treasury Secretary Bessent claims to have more than one trillion U.S. dollars in the Treasury General Account for potential Treasury buybacks. As we’ve already discussed here at Pretiorates, there is indeed nearly one trillion U.S. dollars in that account. But the government also needs that money to pay its ongoing bills.
Realistically speaking, Bessent probably couldn’t use much more than 100 to 200 billion U.S. dollars from this fund to support the bond market—and even that might not be enough. Additional Treasury issuances would also be a delicate matter. The more bonds enter the market, the higher the yields investors might demand.
We don’t have the big solution either. But the idea that, sooner or later, the topic of quantitative easing could come back onto the table at the Fed is gaining increasing traction. The Fed would have to act as a buyer of U.S. Treasury bonds to increase demand and thereby push down yields. Officially, of course, it wants nothing to do with that. The new Fed Chair, Kevin Harsh, emphasizes at every opportunity that inflation is his top priority. At the same time, however, the Fed has been buying Treasury bonds again since December 2025. By early July 2026, it had purchased securities worth approximately $250 billion. Officially, of course, this isn’t called QE, but rather “Reserve Management Purchases.” It sounds technical, harmless, and, above all, much less like a money-printing machine. The stated goal is merely to ensure sufficient reserves in the banking system.
But will it stay that way? That’s exactly what’s likely to be exciting in the coming weeks and months. We’re curious to see what remedy will ultimately be prescribed for the rising fever curve of the U.S. bond market. If the government and the Fed wait too long, the stock market is likely to become unsettled sooner or later—and by then, at the latest, QE could suddenly transform from a forbidden word back into a desperately needed beacon of hope.
That’s still a long way off. But gold, silver, and even cryptocurrencies should, just to be on the safe side, start lacing up their shoes and slowly make their way toward the starting line.
We wish you successful investments!
If you enjoyed this issue, please click on the Like icon at the top or at the bottom of this email. This is very important in helping our Thoughts gain more followers. And don’t forget to recommend us - with the button below. Thank you!
Yours sincerely,
Pretiorates
Find out more about Pretiorates.com
Remember, we are not making any recommendations for investments, we are just giving you ideas for your own analysis and decisions! Do your own due dilligence!
If you like our short analysis, please recommend us to your friends!
Thank you for being a part of the Pretiorates community. Stay tuned for more updates, analyses, and deep dives into the realms of finance and economics.