What I am Reading Tonight

From the Iranian side of the house.

Why did Brent crude oil futures suddenly drop from $126, its highest price in the past four years (during the Corona period), to around $114?

The recent drop in oil prices had two main and behind-the-scenes reasons:

1. End-of-Month Rollovers: At the end of each month, major oil traders must settle their futures contracts or roll them over to the next month. This capital movement causes severe fluctuations, traders take profits, and as a result, a temporary drop in prices.

2. Japan’s clever intervention and manipulation: The second reason, which is much more interesting, was the direct entry of the Japanese government into the market to save its national currency (the yen). Since Japan is a net importer of energy, expensive oil causes a lot of dollars to leave the country and the value of the yen to fall sharply (which recently reached 160 yen against the dollar). Japan made an unprecedented intervention to prevent this disaster.

How did Japan manipulate prices? (The US bond story)

​Instead of just intervening in the currency market, Japan decided to attack the root of the problem directly, which is "high oil prices"!

​Did it sell US Treasuries? Yes. Japan is the largest holder of US government bonds (debt) in the world. To finance this intervention, the Japanese government was forced to sell some of these US Treasuries to get cash (dollars).

​How was the manipulation done? Recent reports show that Japan used these cashed dollars to use an unprecedented tactic: shorting the oil futures market. That is, they bet with their huge capital on "decreasing oil prices" and virtually sold a large amount of oil in the market. This heavy and artificial supply caused traders to panic and the price of oil to fall rapidly, which ultimately benefited the Japanese economy and strengthened the yen.

What is the impact of this on the US economy?

Japan's actions are problematic for the US economy. When Japan sells a large amount of US bonds on the market, the supply of these bonds increases and their price decreases.

According to the laws of economics, when the price of bonds falls, their "interest rate or yield" (Yield) rises. Rising bond yields in the US mean:

Mortgages, car loans, and credit card interest become more expensive for Americans.

Borrowing costs for US companies rise, which can slow economic growth.

The Federal Reserve's job to control the economy becomes much harder.

How long can Japan keep this up?

Japan has huge foreign exchange reserves (about $1.4 trillion), but this money is not infinite. Experts estimate that each round of these heavy market interventions will cost Japan between $10 billion and $20 billion.

If the main crisis (geopolitical tensions and blocked energy routes) is not resolved, Japan will not be able to stand in the face of market reality for long. They can eventually buy a few months of time this way, but if they were to burn all their reserves, they would face a much larger economic crisis at home.

Finally, it is worth noting that the highest Brent futures price was $147, which occurred just before the Great Financial Crisis of 2008 and the global economy entered a recession. However, just a few months later, as markets collapsed and demand fell sharply, oil prices fell to around $34.

Even before the war, there were signs that the global economy was likely to enter a recession. In these circumstances, the United States will have to make its decisions as quickly as possible; Otherwise, the continued blockage of the Strait of Hormuz and the increase in oil prices could make this recession a certainty.

From Yahoo News:

https://finance.yahoo.com/markets/currencies/articles/japan-issues-final-warning-intervention-101255980.html

And because everybody likes images:  The usual threats against our Fleet assets continues.