A quick victory is now a pipe dream; Wall Street is pondering: how long can the petrodollar survive?

Author: Zhou Ailin, Tencent News "Deep Dive"

Editor's Note: In early 2026, the war in the Middle East is crossing traditional geographical boundaries, reshaping the global capital landscape and reconstructing the risk pricing logic of global capital with unprecedented intensity. From the tanker shutdown in the Strait of Hormuz to the liquidity black hole surging in the shadows of Wall Street, the "butterfly effect" of the war is causing dramatic shocks across various asset classes.

The head-on collision between macroeconomic cycles and geopolitics is testing the resilience of every market participant.

In response to this complex systemic shock, Tencent Finance launched the "Global 'Bill' of the Middle East War," a series that examines everything from supply chain disruptions and capital market volatility to the shift in oil pricing, the reallocation of safe-haven funds to precious metals, the Federal Reserve's policy constraints between inflation and recession, and the asset revaluation of Dubai as a regional safe haven. Through continuous in-depth observation, we aim to deduce the macroeconomic trajectory and the logic behind asset evolution. The Middle East war has now lasted three weeks, and Wall Street traders are gradually breaking down – what happened to the promised swift victory? What happened to the expected short-term surge and subsequent decline in oil prices? This misjudgment is particularly evident in the contrast between the indices and reality – before last Friday, the S&P 500 had only fallen 4% from its high, but we are facing the largest oil supply shock in history, 15 times larger than during the peak of the Russia-Ukraine conflict. The pent-up emotions erupted on March 21st—the S&P 500 fell below its 200-day moving average, hedge funds drastically reduced leverage, and US stocks saw net selling for the fifth consecutive week. Except for rising oil prices, all assets were falling. However, no hope appeared ahead; instead, concerns about a protracted war arose. According to Xinhua News Agency, the Trump administration was reported on the 20th to be significantly increasing its troop presence in the Middle East, including sending additional ground troops. This fueled speculation that the US military was considering seizing Kharg Island, Iran's oil export hub. Several frontline market research professionals told Tencent News's "Deep Dive" that even with Trump's repeated unilateral TACO actions, a quick victory was impossible. Whether it was a concession or a protracted war, it was all negative for dollar assets, and the risk of the petrodollar's collapse was rising. I. Trump's Difficulty in Unilaterally Tacoing On March 23 local time, Trump stated that he would postpone any US attack on Iranian power plants for five days while relevant negotiations were underway. He also claimed that the dialogue with Iran was "perfect" and that key points of the agreement had been reached. However, at least based on public statements, Iran seems to deny any progress in ending the war, which has now entered its fourth week. "A 'quick victory' is basically impossible," Yuan Yuwei, a senior global macro fund manager and investment director at Liangke Investment, told Tencent News's "Deep Dive." "TACO is entirely a US-centric narrative that doesn't take Iran's demands into account." "Iran has no way out (Israel wants to eliminate it completely, and Trump doesn't recognize the new leader), and Trump's capitulation means 'political suicide,' the collapse of the petrodollar, and a Democratic purge. The escalating 'seizure of Kharg Island' last week is not a shortcut for the US either. This will expose the US military to low-cost Iranian drone attacks, potentially forcing them to deploy more troops or even expand the front lines. Trump is undoubtedly afraid of this outcome." Therefore, more and more traders are reaching a consensus—the probability of a "protracted war" is rising, which will lead to higher oil prices, higher inflation, accumulated US debt, and a fall in US stocks. The risk of interest rate hikes could trigger other crises, including private credit. Traders are clearly not fully pricing in this. Currently, as long as crude oil prices continue to climb, other major asset classes are unlikely to rise significantly. This pattern has led traders to abandon trading recently. "It's difficult to trade now; we need to wait and see how things develop," said Situ Jie, a veteran US stock trader and manager at Luoyan Private Equity Fund, to Tencent News's "Deep Dive." In early March, market sentiment was more optimistic, believing that no matter how far the confrontation between Iran and the United States progressed, negotiations would eventually be necessary. This was because many believed that Iran, having been weakened to this extent, might eventually compromise after maintaining a brief period of strong responses. However, traders now seem to have misjudged this assessment of Iran. According to Xinhua News Agency, the Iranian Foreign Ministry issued a statement on March 22, stating that the Strait of Hormuz was not blocked and that ships could continue to navigate the waterway, provided they adhered to the necessary measures taken due to the war situation. The statement said that ships belonging to the United States, Israel, and other countries involved in the aggression do not meet the conditions for normal and non-hostile passage, and Iran will deal with them in accordance with the law. "Although some see this statement as a downgrade of risk, it is actually Iran warning European countries, Japan, and others not to join the war," said Situ Jie. II. Increased Upside Risk in Crude Oil Crude oil has become the only asset currently experiencing a continuous upward trend, which may be why Trump wants TACO. According to Tencent News' "Deep Dive," one of the more active and high-probability trades currently being participated in by traders is crude oil spread trading, namely going long on Brent crude oil and shorting WTI crude oil. Brent crude oil is North Sea crude oil and is the global pricing benchmark; most crude oil trade in Europe, Asia, and the Middle East is based on Brent. WTI crude oil is West Texas Intermediate crude oil and is the US domestic pricing benchmark. The price difference between the two has recently approached $20, with WTI still below $100 and Brent having previously broken through $120. However, the above only refers to the financial pricing (futures) of oil; there is an even larger gap between these and the real costs in the physical world—in reality, the cost of physical crude oil shipped to Asia has exceeded $170. With refined oil prices soaring, jet fuel has reached $220 in Rotterdam and as high as $230 in Singapore. The most severe crude oil supply shock in history. Source: Wall Street investment bank research report, produced by Tencent Finance. The supply shock continues. In the Strait of Hormuz, tanker traffic has plummeted by 97% below normal levels, currently maintaining a meager flow of only about 600,000 barrels per day. After considering pipeline detours, the total loss of oil flow in the Persian Gulf is estimated to be as high as 17.6 million barrels per day—equivalent to 18 times the peak loss of Russian oil production caused by the Russia-Ukraine war in April 2022. Goldman Sachs' historical data analysis shows that four years after a large-scale oil supply shock, the average production decline is approximately 42%, with infrastructure damage being a major factor. Recently, Middle Eastern energy infrastructure has suffered continuous bombing, with several key facilities recently damaged: Two Kuwaiti refineries have ceased production, with a combined crude oil processing capacity of 800,000 barrels per day; the Saudi Yambb Samre refinery (with a daily processing capacity of 400,000 barrels) was attacked, temporarily halting loading at the Yambb port; and the UAE's Bab oil field was attacked, causing nearby natural gas facilities to shut down. Qatar Energy disclosed that the previous attacks could damage 17% of Qatar's LNG production capacity, affecting it for 3 to 5 years, while also threatening normal production at the region's gas-dependent oil fields. Emergency policy measures have also proven largely futile—the US Treasury Department officially confirmed that the authorization for Russian offshore oil sales (including "shadow fleets") will be extended to April 11; Treasury Secretary Bessenter hinted that a similar exemption for sanctioned Iranian offshore oil is under evaluation. However, Wall Street investment banks poured cold water on this: currently, Russia has approximately 131 million barrels of oil floating on the surface, and Iran has approximately 105 million barrels, totaling about 236 million barrels—even if all of them were released, it would only offset the disruption to traffic in the Strait of Hormuz for about two weeks. For reference, during the previous three oil crises (1973, 1979, and 1990), crude oil prices doubled each time, while this time, since the outbreak of the Iran-Iraq War, oil prices have "only" risen by less than 40%. Iran has even warned that oil prices could reach $200 per barrel. Of course, this concern is expected to ease once the war ends, but this is not something that Trump can achieve unilaterally through TACO. III. The Risk of the "Petrodollar" Disintegration Rises A severe oil shock would not only hit growth and inflation but could also trigger a liquidity crunch. UBS believes that even without aggressive interest rate hikes, the market may price central banks more hawkishly, thereby tightening financial conditions. This pressure could spill over into private lending and high-yield bonds, exposing weaknesses and forcing deleveraging. On Friday's close, the S&P 500 fell below the massive 6600 level, the largest drop below its 200-day moving average in a long time. The Nasdaq also plummeted below its range low, closing below its 200-day moving average. More importantly, Wall Street is beginning to price in a larger shift—the gradual weakening of the petrodollar's status. The core logic of the 1974 agreement was that Saudi Arabia (and OPEC) promised to price and settle oil only in US dollars, while the US promised military protection for the Saudi royal family and open access to US Treasury bonds. The result was that demand for the dollar was permanently embedded in global energy trade. Yuan Yuwei told Tencent News's "Deep Dive" that regardless of whether it's a concession or a protracted struggle, the current situation is a major negative for dollar assets, and a quick victory is simply impossible. The key issue is the rising risk of the petrodollar system's collapse. Middle Eastern countries have suddenly discovered that US-established military bases are not only unhelpful but also pose a greater threat. "If the US unilaterally ceases hostilities, the Gulf states will become victims and sacrifices in this farce, and the petrodollar system will face a more severe risk of disintegration. For example, it could lead to Gulf states withdrawing from US Treasury bonds and stocks, thereby triggering US debt risks; or canceling investment plans in US AI infrastructure, prematurely destroying the financing cash flow of the US AI ecosystem, and accelerating the outbreak of an AI debt crisis," he stated. Meanwhile, rising inflation expectations are negative for US Treasury bonds. "The strategic oil reserves released by the G7 will likely be depleted in about 20 days. If the war isn't resolved within 20 days, the G7 will face a short squeeze. During the Russia-Ukraine war, US inflation reached as high as 9%. If US Treasury yields reach 9%, they'll immediately start bombing. 5% is a crucial threshold; the impact will be even stronger after exceeding 5%." For Asia, industry insiders believe that South Korea's dependence on the Strait of Hormuz is approximately 70%, Japan's is 90%, and China's is 42%; TSMC's power supply comes from natural gas for about 53%, and Samsung's is 27%. However, relations between Japan, South Korea, and Iran are poor. If the strait remains blocked, these companies' production capacity may decline, potentially leading to a decrease in chip production capacity, which could ultimately cause the collapse of the AI ​​logic chain. For China, short-term negative factors cannot be ruled out, but there are also positive factors in the long term. The impact lies in the fact that the valuation of the previously surged AI sector is very high, and it cannot be ruled out that it will be affected. However, the market responded quickly—new energy, electric vehicles, and solid-state batteries have already shown some performance (BYD surged 8% at the opening on March 23). Faced with the current situation, risk control has become significantly more difficult. Traders are beginning to realize that risk is never just a matter of numbers. It is a matter of human nature. U.S. Army Lieutenant General H.R. McMaster once quoted John Keegan, considered one of the 20th century's greatest military historians, which perhaps best encapsulates this moment: "The study of battle is always the study of fear and courage, of leadership and obedience, of doubt, error and misjudgment, and of conviction and vision; it is the study of violence, and sometimes of cruelty and compassion. But above all else, it is always the study of cohesion—and often, of disintegration."