$80 oil, a dead supreme leader, and a Fed with zero options

Happy Sunday

Unfortunately what the markets have been signalling has come true. The US and Israel just launched a full-scale military campaign against Iran. This happened hours after Friday's close, and it reframes the entire week we just had.

Iran: what happened

Early Saturday morning, the US and Israel launched coordinated strikes across Iran. This isn't a repeat of last summer's limited hits on nuclear sites. Strikes hit at least 24 of Iran's 31 provinces. Targets included IRGC command centers, missile launchers, air defenses, nuclear facilities, and military airfields in Tehran, Isfahan, Qom, Tabriz, and Shiraz.

Over 200 killed. 747 injured according to Iran's Red Crescent. The deadliest single incident: 148+ killed at a girls' school in Minab. That will dominate Monday's news cycle.

Trump announced "major combat operations" from Mar-a-Lago and told Iranians to "take over your government." Israel's leadership is calling this an existential strike, not a warning shot. They hit Khamenei's compound in central Tehran. Satellite photos show it reduced to rubble.

Trump posted on Truth Social that Khamenei is dead. As of Sunday, Iran has officially confirmed it. State media reversed their Saturday denials. The government declared 40 days of mourning and a 7-day national holiday. Family members were also killed in the compound strike.

A transitional 3-person Leadership Council has formed: President Pezeshkian, Chief Justice Mohseni-Ejei, and senior cleric Ayatollah Arafi. Pezeshkian went on video vowing "blood and revenge." But behind the scenes, AP and White House sources say the new leadership has quietly signaled openness to talks with Washington. Trump confirmed: "They want to talk, and I have agreed to talk." Defiance publicly, negotiating privately. That's a pattern worth watching.

Israel says they've now killed at least 40 top Iranian officials. The IDF confirmed seven in a press conference Saturday, including Khamenei adviser Ali Shamkhani. Whether this council survives the week is an open question.

Iran is retaliating hard. Hundreds of missiles and drones launched at Israel and 27 US bases across Bahrain, Qatar, the UAE, Kuwait, Jordan, Saudi Arabia, Iraq, and Oman. Most intercepted. But a direct hit on a synagogue area in Beit Shemesh killed at least 9 Israelis. Dubai and Abu Dhabi airports were hit. Kuwait airport took damage.

The Pentagon confirmed the first 3 US service member deaths on Sunday, hit at a base in Kuwait. Five more seriously wounded. That number was zero 24 hours ago. It changes the domestic political conversation fast. Democrats are already pushing a war powers resolution calling this an "illegal war."

Strikes entered day two Sunday. Israel launched fresh waves into "the heart of Tehran" and claimed near-total air dominance. The US deployed B-2 bombers overnight to hit hardened ballistic missile facilities. Trump announced 9 Iranian naval ships sunk and the naval HQ "largely destroyed." Over 1,200 munitions dropped across 24 provinces so far. Trump said operations are "ahead of schedule."

The Strait of Hormuz

Iranian state media announced the Strait is effectively shut. Ships reported hearing a radio broadcast from the Iranian navy declaring transit banned. Hundreds of oil and LNG tankers are now anchored. Maersk is rerouting. Insurance premiums are up 25-50%. At least two tankers have been struck, source unclear. Iran's foreign minister denied plans to mine or fully close the Strait "at this stage," which is not exactly reassuring.

A third of the world's seaborne crude exports flow through that waterway. 14 million barrels a day. China gets half its crude imports from there.

Iran has never fully closed the Strait before and probably can't sustain a blockade against the US Navy. But they don't need to. Mines, tanker harassment, and insurance risk alone spike shipping costs. The war premium gets baked into every barrel whether the waterway is technically "open" or not.

Brent surged 10% Sunday to roughly $80 a barrel. That was the number I flagged yesterday as the knee-jerk level. The question now is whether it holds there or pushes toward $100. If Hormuz stays disrupted for more than a few days, $100 is on the table.

OPEC+ pledged a modest output hike of 206,000 barrels per day for April. It's a gesture. Spare capacity is limited and a supply decision doesn't offset a shooting war.

Dow futures dropped 622 points after Friday's close. Gold is around $5,300. Bitcoin dropped 2% Saturday. UAE and Kuwait stock exchanges closed for Monday and Tuesday.

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Three scenarios for how this plays out

Scenario 1: Contained and fading (35-40% odds)

This looked like the base case Saturday. It's harder to argue now. Day 2 brought B-2 bombers, 9 ships sunk, continued strikes on Tehran, and 3 dead Americans. That said, the back-channel talk signals are real. If the Leadership Council's private diplomacy produces a ceasefire framework by mid-week and tanker traffic resumes, oil pulls back toward $75-80 and equities recover some of the damage. The June 2025 playbook still applies but the window for it is narrower than it was 24 hours ago.

The back-channel signals are the only reason this isn't lower. If those talks are real, we could see a framework emerge faster than people expect. Markets would rally hard on any ceasefire headline.

Scenario 2: Multi-week campaign (45-50% odds)

This is looking like the base case now. Trump said Saturday the bombing will "continue uninterrupted throughout the week or as long as necessary." Sunday confirmed it: fresh strikes, B-2 deployments, naval operations expanding. If operations continue and the Strait stays disrupted, oil sustains at $80-90, the stagflation narrative becomes the dominant macro theme, rate cut expectations get repriced hard, and equities take another leg down. This is the scenario where that hot PPI number on Friday starts mattering a lot more because energy adds another inflationary layer on top of tariff pass-through.

This is the scenario where the Health Dashboard matters most. Breadth will tell you whether selling is broad-based or concentrated in a few names.

Scenario 3: Regional war (15-20% odds)

Hezbollah in Lebanon, militias in Iraq and Syria, Houthis in Yemen all fully activate. The Strait stays closed. $100+ oil. Every portfolio assumption from the last 18 months gets thrown out. This was 10-15% on Saturday. I'd bump it slightly higher now. Iraq PMF already hit, Pakistan boiling over, Hezbollah gathering but holding fire. One Hezbollah rocket barrage from southern Lebanon changes this from a bilateral conflict to a multi-front war.

What I'm watching (with specific tells)

1. Does the Leadership Council hold or fracture?

Khamenei is dead and Iran admitted it. A 3-person council is running things. They're publicly vowing revenge while privately signaling openness to talks. Iran's foreign minister says a new supreme leader "may" be selected "in a day or two." The question is whether this council consolidates or gets picked apart by continued Israeli strikes (40+ officials already killed). If the back-channel talks produce a ceasefire framework this week, Scenario 1 plays out. If the council fractures or the IRGC overrides it, we're deeper into Scenario 2.

Worth noting: the Pentagon authorized non-emergency personnel departures from Qatar and Bahrain. You don't pull families out for a 48-hour operation.

2. Strait of Hormuz tanker traffic, not rhetoric

Forget what Iran says. Watch what ships do. If tankers resume transiting by Sunday night or Monday morning, the oil spike fades. If shipping stays paused or Iran starts laying mines, $80+ becomes the new floor and Scenario 2 kicks in.

3. OPEC+ already responded

They pledged 206,000 bpd for April. It's marginal. Spare capacity is thin and the Strait is where the spare capacity would need to flow through anyway. This won't cap oil prices if the conflict continues.

4. Gulf state equity markets

UAE and Kuwait exchanges closed Monday and Tuesday. Saudi Arabia's Tadawul is the main read now. Middle East indices that did trade dropped 1.5-3%. If Saudi sells off hard Monday, the region is pricing in prolonged conflict.

5. Proxy front activation (partially underway)

Iraq's Popular Mobilization Forces HQ was hit by a US-Israeli strike, killing four. Hezbollah is holding mourning gatherings in Lebanon but hasn't launched rockets. Protests in Pakistan killed 22+, including a storming of the US consulate in Karachi. The proxies are stirring but haven't fully committed. If Hezbollah fires from southern Lebanon, that's the line between bilateral conflict and regional war.

6. PCE print March 13

Oil is already at $80. If it stays there for two weeks, the inflation picture gets materially worse. Core PCE at 3.2% or higher = rate cuts are off the table for 2026. Watch the 2-year yield reaction more than the equity tape.

I don't know how this resolves. Nobody does. The next few weeks are going to be driven by oil prices, Fed paralysis, and whether this conflict stays contained or spreads. The structural data, breadth, sector rotation, yield behavior, that's where the real answers will show up before the headlines catch on.

Monday will be volatile. The first 48 hours will sort out which scenario we're in. Those tells above will give you clarity faster than any headline will. Energy, defense, and rate-sensitive growth are all going to move differently depending on which scenario takes hold.

I'll be updating throughout the week as developments unfold.

-John

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