By Michael Every of Rabobank
The only way out of this crisis is through
We warned 2026 would tell 2025, which revolved around tariffs, ‘Hold my beer’: yesterday, the US launched two new Section 301 trade investigations, and it hardly registered in the headlines even if it could lead to higher, court-immune US tariffs this summer vs China, the EU, India, Japan, South Korea, Mexico, Taiwan, Vietnam, Thailand, Malaysia, Cambodia, Singapore, Indonesia, Bangladesh, Switzerland, and Norway.
The focus is instead on Iran and Hormuz, as Brent oil tests towards $100 a barrel this morning. As also warned, things are going to escalate before any de-escalation on those fronts. Ignore that “There’s “practically nothing left” to target in Iran”; balance news that US intelligence says Iran’s government is not at risk of collapse with reports suggesting potential cracks forming in it; and above all heed our underlying geopolitical logic, echoed in the Wall Street Journal, that ‘Ending Iran War Quickly Carries Big Risks for the US and Allies’ because “Leaving the regime undefeated could motivate Tehran to develop nuclear weapons and leave it in control of much of the world’s energy flows.” That’s why constant talk of TACO is likely wrong, and both sides are escalating.
The Iranians hit three ships in Hormuz yesterday, as Tehran warned the world to get ready for $200 oil while boasting of new underwater anti-ship weapons. It also struck two oil tankers at port in Iraq, which has seen those key facilities taken out of action. That means another immediate drop in global oil supply while expanding the field of danger for oil flows far wider than Hormuz: could the Saudi Red Sea pipeline to Yanbu be targeted too, making everything exponentially worse? Meanwhile, Iran is able to get its oil out of Hormuz. Tehran also expanded the war into the cybersphere in hacking a US company, and the FBI warned Iranian drones could even hit California’s coast(!)
The US bombed harder and warned Iranian ports are targets if the military uses them. Impotently, the UN Security Council demanded Iran halt attacks on Gulf states; somewhat less so, perhaps, G7 leaders agreed to examine the option of escorting ships to navigate freely through Hormuz – yet that would drag all of them into a shooting war with Iran. (It also comes just after von der Leyen was forced to walk back suggestions that the EU should sometimes look to its own self-interest, rather than just following the letter of international law, if it wants to be a geopolitical actor.) Elsewhere, after Hezbollah and Iran attacked Israel jointly, the IDF pounded Beirut, warned parts of it will ‘look like Gaza’ if such strikes don’t stop, and ordered reinforcements north for a potential broader invasion of Lebanon.
Against this, the IEA oversaw a record release of oil reserves. However, that flow vs the lack of physical supply in Asia already looked like a plaster on a shotgun wound, to quote our energy analyst Joe DeLaura before Iraqi oil ports were taken offline, which is another cartridge fired into the same injury. Indeed, Bloomberg reports some refineries are turning down available oil because they are forced to pay a huge premium over ‘market’ rates; Australia’s top fuel sellers are halting spot sales on tight supply and are only dealing with regular customers; freight rates are sky-rocketing, e.g., a South Indian firm has seen quoted air-freight costs double, while containers via ship have jumped 630% and for refrigeration by 900%, with real fears of no bunker fuel ahead. South Korea is warning that without helium supplies, it won’t be able to keep making semiconductors – the same is true for all global producers outside the US.
Moreover, Chris Cook, a former regulator and director of the International Petroleum Exchange, is deeply sceptical about the huge plunge in oil prices on Monday that reversed the earlier record spike. He posts: “This episode is a macro-market ‘goose’/manipulation –an inverse April 2020– facilitated by the smartest guys in the room and financed (Fed liquidity) & funded (China Treasury collateral) by the same state actors. Ends middlemen era & begins #EnergyDominance paradigm.”
As Joe (on oil) and Florence Schmit (on LNG) note in their latest note on the Iran crisis: “We suspect that the $120 mark will be retested again if the SPR barrel releases are debated over for some time and not implemented immediately while the conflict drags on with no outlet for energy supplies. Our current base case going forward is as follows: we expect that the Strait will remain fully closed through the end of March. We believe that April, May, and June will see the slow return of tankers to the world market via the US insurance guarantees plus US naval escorts of some kind.” And perhaps with G7 help – though that remains to be seen.
In short, the only way out of this crisis is through. Through Hormuz. Through Iranian resistance. Through violence. Anything that happens in the financial, not the physical, space is ultimately irrelevant vs. that dynamic.
Meanwhile, the Japanese press underlines that China’s Xi is torn between his long ties with the Khameneis and US relations. Indeed, we are approaching a critical tipping point. Will China, looking to the upcoming Xi-Trump meeting, help the US to resolve this crisis via pressure on Iran, even if it means that it loses Tehran as a regional ally – and for what geopolitical quid pro quo? Or will it back the regime, along with Moscow, and escalate across different dimensions and geographies?
On that note, amongst a multiplicity of factors, consider that while China has stocks of key goods and Iranian oil can still flow to China for now, helium, sulphur, and fertiliser can’t, and China can’t keep exporting to the rest of the world (excluding the US) if it’s all sucked into an economic crisis. Beijing also prizes stability. Yet to say there’s a lot riding on the US-China angle, which most commentators have belatedly explained this Iran war is all about, is an understatement.
Yet there are other things worth noting today – really:
Ukraine has reached a milestone: making ‘China-free’ drones. It’s now supplying anti-drone tech and know-how to the Gulf. That shows how supply chains can shift if one wants, and how an understanding of how to use, and resist, applied violence is key to success in the current world order. Indeed, Zelenskyy just told Trump, via Politico, to put more pressure on Putin, ‘not on me’.
In France, the far-right presidential candidate Bardella’s main rival, former PM Édouard Philippe, risks crashing out of 2027 race if he loses an upcoming local election to a Communist challenger, which, following local election results in Germany, says a lot about political polarisation and rules-based orders even before we get any fat tail inflation risks from the current Iran crisis.
And traditionally free-market Hong Kong now has its first 5-year plan… to develop its role as a global financial hub.
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