Ahead Today
G3: US Empire Manufacturing
Asia: China Macro data
Market Highlights
Brent oil prices climbed to US$103/bbl, as US attacks over the weekend on Iran’s main export hub increased risks of a further escalation. The strikes targeted military installations in Kharg Island but with oil infrastructure spared so far. The messages coming out of the Trump administration has been mixed, with Trump highlighting the possibility of negotiations to end the conflict although he claimed that the terms were not good enough yet including on commitments from Iran on nuclear weapons. Meanwhile, Kevin Hasset, head of the White House’s National economic Council said the Iran war will take between four and six weeks, although the ultimate decision on when the war will end lies with the President. There were also intensifying calls by Trump asking Nato allies and Asian economies to help in reopening the Strait of Hormuz, with the WSJ also reporting that a coalition to escort ships through the SoH could be announced later this week.
Ultimately for Asian economies and FX and rates markets, it boils down to the Strait of Hormuz – and what it would take to credibly re-open it. And on our end we are not entirely convinced that these steps the Trump administration are taking now including on getting allies to help will meaningfully help on that front for a few reasons.
First, from Iran’s perspective, it makes absolute sense to press for more advantage including through inflicting more pain on the global and US economy including through higher oil prices, if only to establish deterrence on US and Israel over the medium-term through asymmetric warfare.
Second, from a military perspective, the US may want to assemble a coalition of partners to reopen the strait, but ultimately the US will have to take the first step in escorting ships. The fact that the US Navy haven’t yet done so and have ironically publicly sought for help suggests to us that there are probably significant difficulties in doing so with probably a high chance of casualties, given Iran’s geographic advantages such as its mountainous terrain along its coastline along the Strait.
Third, from a commercial perspective, shipping and insurance companies will only gain more confidence in sending ships through the SoH once they see a credible flow of vessels without any incident. For Iran, they probably don’t quite need to hit many ships – just a few perhaps in order for private sector risk aversion to remain high with an effective closing of the Strait.
Nonetheless, the good news is that there have been increasing reports of ships allowed passage through the SoH, including two tankers from India carrying Liquified Petroleum Gas. With India facing an LPG shortage right now given that more than 95% of its propane imports come from the Middle East, this could help ease some of the supply related fears at the margin. In addition, alternative pipelines from Saudi Arabia and UAE to bypass the Strait seem to be ramping up, with roughly 5-7mb/day from Saudi’s East-West pipeline and slightly less than 2mb/day from UAE’s Fujiarah port. As such, the effective blockage from the Strait could be closer to 11-12mb/day compared with the headline disruption of 20mb/day through the SoH.