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Market Highlights
Trump announced a blockade of the Strait of Hormuz over the weekend, after US and Iran negotiators left Pakistan without an agreement following a marathon 21-hour session. Brent oil prices surged 9% to US$103/bbl, risk assets fell, the Dollar strengthened, and Asian currencies weakened. While there were initial questions around how exactly this blockade will be enforced, subsequent details from the US Central Command suggests that it’s less strict than the tweet implies, and in particular it is enforced against “vessels of all nations entering or departing Iranian ports and coastal areas, including all Iranian ports on the Arabian Gulf and Gulf of Oman”. In particular CENTCOM also added that it will not impede the freedom of navigation for vessels transiting the Strait of Hormuz to and from non-Iranian ports and will begin enforcement on Monday 13 April at 10am Eastern time around the time US markets open. While this is not exactly a blockade of the Strait of Hormuz, how this will work in practice including the act of differentiating the origin of vessels is still unclear.
It is however important to highlight the important positives that have developed over the weekend despite Trump’s announcement.
- First, this was the highest level of diplomatic contact between the US and Iran over the past four decades, and with the Iran side in particular sending in a meaningfully large delegation including economic officials such as the central bank governor, and as such highlighting the seriousness the Iranians in particular brought to these negotiations.
- Second, reports suggest the negotiations stretched into technical and expert level meetings on the second day, and as such indicating that there were substantive discussions and progress being held. The NYTimes reported that there were 3 main sticking points that remained: 1) the reopening of the Strait of Hormuz, with Iran saying it would do so only after a final peace deal. 2) the fate of nearly 900 pounds of highly enriched uranium, with Iran making a counterproposal but both sides unable to reach a compromise, and 3) Iran’s demand that about US$27bn in frozen revenues held abroad be released.
- Third, there were three oil supertankers which crossed the Strait of Hormuz over the weekend, and totalling around 6 million barrels. This would likely represent the largest non-Iranian tanker flow since the Iran/Middle East conflict started.
Of course, all these points are moot if hostilities resume, which ultimately also depends on how this blockade is enforced. Will Chinese tankers taking Iranian oil from Iranian ports be blocked for instance? We have our doubts about that and how that will work in practice.
The bigger issue we think is that it may be difficult for the Iranians to durably trust the Trump administration after this episode (whatever little that was left), and as such, a more prolonged conflict which over time increases the cost of war for Trump looks more likely than not, even as a left tail risk of a substantial escalation might be contained for now.
The corollary is that a meaningful resumption of flow of traffic through the Strait Hormuz looks much less likely now, and as such the bias for Asian currencies especially energy importers such as INR, PHP and THB is likely to be on the backfoot for now.