Stand and deliver!

Looking on the funny side of global events is often the only way to get through the news cycle that can affect financial markets, especially with US President Trump in full steam ahead mode. In a previous blog we suggested that his war on Iran could make it on the list of the 100 most idiotic wars in human history. The resumption of this war (apparently on 07^th July, as the administration stated to Congress over the weekend according to Politico) starts another 60-day clock for the Trump administration before they need Congressional approval. Or, the Trump administration could play the hokey-cokey game with Congress and say ‘we are in a ceasefire’ and keep fighting, and then say ‘we are at war’ and start the clock again.

President Trump seems to be making a messy situation worse though. On Monday he suggested that the US is set to implement a total blockade of all Iranian shipping through the Strait of Hormuz, and charge everyone else a 20% fee based on the value of their cargo, starting on the 14^th of July. How the US would enforce the blockade and implement their charge is not known yet. This is a huge change from the US policy of not allowing anyone to charge for transit through the Strait of Hormuz and shows how the best laid plans rarely survive once wars start. From a potential ‘saviour of international trade and markets’ (ignore the fact that the US pushed Iran to threatening to shut the Strait in the first place…) to effectively being a highway robber!

Remember when Iran proposed their $2 mio per ship fee to transit the Strait? For an interesting view of the Iranian proposed fees, Discovery Alert has some useful numbers. They noted that ‘Alternative routing options present significant cost and capacity constraints. The Suez Canal Route adds 15-20 days transit time and $300,000-700,000 in additional fees. The Cape of Good Hope increases voyage time by 25-30 days with proportional cost increases. Pipeline alternatives offer limited capacity through existing infrastructure in Turkey and Central Asia, whilst Arctic routes provide only seasonal availability with specialised vessel requirements.’ In other words, using other routes would be expensive in both time and money.

Under the Trump plan, the attempt by Iran to charge up to $2 mio per cargo ship looks downright reasonable. The average container ship may have $50 mio to $100 mio of cargo, and some very large crude carriers can have $200 mio to $250 mio of cargo onboard. The Trump charge could be from $10 mio to potentially $50 mio per ship. Get ready for many shipping companies to consider taking the long way around, if they can. Or more likely, anchor again and break out the cards and hope for something sensible to happen.

Trump could have a cunning plan of course. Do something crazy to really shut down traffic in the Strait of Hormuz, removing the Iranian threat of doing the same, and see who blinks first. All while bombing Iranian facilities/infrastructure and inflicting collateral damage. The rest of the world? Gulf countries may see Iran retaliate and the risk of escalation to other countries probably increases if this continues. Stock markets will wobble again, rates may rise as higher energy prices take a toll on inflation readings and cost of living etc. Will Iran surrender unconditionally etc.? We still doubt this. The regime lasted a brutal 8 year war with Iraq and there doesn’t seem to be much in the way of an opposition to the leadership that would make a difference even if there was a regime change.

The weekly chart of ICE Brent prices below (with 13 and 50-week moving averages) shows the abrupt turn higher over the last two weeks. Watch the $90/bbl. area (13-week ma) and then $118/bbl. falling line. A break of the latter and back to $147/bbl. risk for pressure on $150/bbl. and then a lot higher. We don’t favour this but…

Watch equity markets, as Trump does have ‘TACO’ tendencies. A -20% fall in the stock market and oil pushing above $100/bbl. (or gasoline hitting $5 a gallon at the pump and climbing…) would probably get him to declare victory and quit blockading the Strait of Hormuz, regardless of what is actually happening. Until then, brace for more uncertainty, and continue to hope for the best, and plan for the worst. 

Gerry Celaya, Chief Strategist