Earlier this week, while editorializing around Donald Trump’s ad hoc announcement that the US government’s prepared to financially insure tankers transiting the world’s most important oil chokepoint, I gently suggested this is a rare case where it’s not all about the money.
“The promise of cheaper loss insurance is great, but you could pretty easily be killed trying to ‘drive’ a tanker through [the Strait of Hormuz] right now,” I wrote.
In the same article, I flagged a distinction Trump made between the timeline on financial insurance for at-risk energy cargoes and a physical backstop for those vessels in the form of US warship escorts. The former, Trump said, would be available “immediately,” the latter “as soon as possible.”
The fact that oil prices kept rising for the remainder of the week with only a fleeting reprieve accompanying Trump’s promises, spoke to the veracity of my assessment that notwithstanding tanker crews’ high risk tolerance, no one’s going to brave the Strait unless accompanied by the US Navy.
WTI was up more than 13% Friday north of $92, a “yikes” move attributed in part to reports that Kuwait, like Iraq earlier this week, has been forced to cut output for lack of storage. That likely engendered a sense of panicked urgency at The White House.
Ignoring the bizarro shenanigans seen in March and April of 2020, it’s fair to call Friday’s jump the most dramatic oil market event since Qassem Soleimani and the Houthis attacked Abqaiq and Khurais in September of 2019.
Forget the (staggering) move for the week mentioned here first thing Friday morning. We’re talking about 21% on US crude in just two days.
That’s a crisis, or if it’s not yet, it will be soon. Trump has to put the brakes on this, and the reinsurance scheme he announced Friday isn’t likely to be sufficient.
The specifics, if you can call five short bullet points “specifics,” of the plan provide for $20 billion of loss coverage, which DFC chief Ben Black called “a level of security no other policy can provide.”
That might be accurate as it relates to financial security, but as Kpler’s Matt Wright told CNBC, the reason tankers aren’t transiting the Strait is because crews are concerned for their lives. As the linked article put it, paraphrasing Wright, “insurance is not the main problem right now.”
In the DFC statement, Black alluded to a role for the navy, but the announcement was even shorter on those specifics than it was on details for the reinsurance plan. “We, and Treasury are coordinating closely with CENTCOM on next steps,” Black said.
I’ll tell you what “next steps” needs to be here, but before I do, let me be as clear as possible that when I use the word “needs,” all I’m referring to is what it’ll take to give ship owners and crews the confidence to brave that route. I’m not making a normative judgment, nor am I suggesting this is right, desirable or even feasible in the context of international blowback.
With that (oh-so-crucial) caveat, if Trump wants to break the Gulf logjam and alleviate the pressure on regional storage facilities, he needs to make it clear to Iran, and thereby to everyone else, that tankers are off limits to the IRGC, and that if a single hair on an oil shipman’s head gets singed on the way through the Strait, the US and Israeli air forces will raze Tehran, in a very literal sense of the word “raze.”
Again, I’m not advocating that. God knows I’m not. But the problem with naval escorts is that, as we saw in the Bab al-Mandab with the Houthis, the mere presence of US warships isn’t enough to guarantee that people won’t be killed by vindictive Iranians or their proxies in dangerous waters.
Trump said earlier Friday he wants “unconditional surrender” from the Iranians and isn’t prepared to accept anything less. Just hours later, Fars said the IRGC intends to target ships linked to the US and Israel in the Strait, not exactly a sign that the regime’s prepared to wave the white flag.
Those of you who followed the standoff with the Houthis will recall that Iran’s definition of “linked” tends to be very loose when it comes to picking maritime targets. In simple terms: If there’s a ship in the Strait, the IRGC’s probably going to find a way to consider it “linked” to America or Israel.
This is a time to spare a thought for everyday Iranians in major population centers. Because if the IRGC manages to sustain this fight and Riyadh can’t reason with Tehran at least as it relates to energy transiting the Strait, the US bombing campaign could take a turn for the barbaric at some point soon. Particularly considering Trump’s being advised on war strategy by a country which knows a thing or two about razing territory.
When it was all said and done for the week, WTI rose 36% in five days, the largest weekly advance in history.
I read that the DFC may not have the funds necessary to backstop insurance coverage. That’s even if the agency has been working on a plan “for months”, as Bessent claims (I’m quite skeptical).
https://www.cbsnews.com/news/trump-dfc-persian-gulf-ship-insurance-iran-war/
DFC’s limit is $200BN and I read it already has a good part of that committed elsewhere.
More to the point, why is it the US that should be putting up the $200BN or $300BN of risk capital? Why isn’t it the Gulf States whose oil and LNG is blocked from market? I know, it is Trump’s war, but isn’t he a better negotiator than this?
Good point. And you might ask why countries in Europe and Asia are not lining up to provide naval ships as well. As they did to help defend shipping lanes in the Red Sea.
Well, and let me give it straight, without irony, so you can understand what I’m saying. Why should Asia, Africa, Australia, South America or Europe send ships? It’s your war buddy ( I assume you’re American). You guys voted for it. You and your country is messing with the price of petrol ( cause that’s what it’s called) in my country and I will blame it on you. And you can de-escalate this, as much as Russia can stop their idiocy, by stopping attacking. Or stopping the idiot you voted for.
“Is messing” should be “are messing” of course. So irritated, I’m losing my grammar. And my temper. Good thing I didn’t answer in my first language, want dan het ek jou regtig uigekak.
Oops, forgot to caution you that CBS is now the equivalent of Fox or Newsmax.
I see DFC has announced a $20BN reinsurance facility for Gulf shipping war coverage. So per Bessent, DFC has been working on this for months, but they couldn’t get the decimal place right.
Two of the main purposes of a Navy are to protect shipping and to control sea lanes. The World War II convoys were dangerous places to be. The US Navy often seems to think that its sole purpose is to protect the carrier. If this war is to continue, the Navy needs to commit the resources to open up the Strait of Hormuz. That means putting a combatant ship in the Strait – it doesn’t matter if it is escorting anything or not. Telling ship owners that we will give them a bargain on insurance is not the answer.
Saudi has a modern navy with frigates as well as smaller ships. UAE, Kuwait have smaller navies. I don’t know that they can shoot down missiles, but they should be in the Strait hunting down IRGC attack boats, mine laying boats, UAVs if any, etc.
If history is any indication, they won’t get involved. Back during Operation Prosperity Guardian (the Houthis threatening Red Sea shipping) the Saudi’s didn’t even lift a finger.
I concur, and I think that the US Navy will ultimately act to protect shipping lanes — we already did back during the Houthi Red Sea crisis in 2023. Nevertheless, we were slow to react.
On Nov 19th 2023, the Houthis hijacked their first cargo ship. By Dec 3, they were already launching ballistic missiles at cargo tankers. It wasn’t until Dec 18th that Operation Prosperity Guardian was officially launched.
You can chalk it up to Biden’s less-militaristic approach (or his mental health or whatever) but nevertheless it took about a month to actually put up an organized response. Even if Trump does it in half the time it will still take 2 weeks. I do think it is both feasible and ultimately will be done, albeit slowly.
“the US and Israeli air forces will raze Tehran, in a very literal sense of the word “raze.”
Way back during the hostage crisis, a joke going around NY & London trading rooms was “What’s flat and glows in the dark?” The answer being “Tehran at night.”
And look, again with the proviso that this would be a horrible, horrible outcome, his threats are eminently credible right now and Netanyahu’s threats even more so in being tantamount to statements of future fact. I think if you really want to get this thing open, you tell them what happens if it stays closed.
I think the IRGC’s willingness to sacrifice Iran’s cities and people should not be underestimated.
I also looked at the percent of total electricity generation from Gulf-sourced LNG for different Asian countries. It is not as high as I’d thought from all the headlines.
Looking at JKM and TTF, yes they are +50% on the war, but still within their L3Y range. Not even the slightest bit like 2022.
“I think the IRGC’s willingness to sacrifice Iran’s cities and people should not be underestimated.”
Yeah, but this is a real army. They’re 200,000-strong. They gotta either fight or surrender. They can’t just disappear into gopher tunnels and say “Do your worst!” like Hamas or run off into the hills like the Taliban and wait it out for two decades.
This was always going to be the problem for them: If push ever came to absolute shove, they’d have to fight a conventional war with the US and Israel at the same time, which is to say not an asymmetric, guerrilla fight, but a real, out-in-the-open war.
They never thought they’d actually have to fight that war, and now they’re in it with no way out. Unlike the Iraqi army, they can’t just say “Well, this is obviously hopeless and the big man’s gone anyway, so we’ll just quiet quit.” Because they’re every bit as synonymous with the regime as Khamenei was. They can’t play the “We never liked the regime anyway” card. They are the regime.
It’s so bad. They’re in a lot of trouble. I mean, obviously Trump is too in many political respects as we just saw with a 36% five-day oil surge, but the IRGC’s risking total oblivion. They need to i) tell the clerics that it’s over, ii) formally / loudly surrender on behalf of the regime and offer to establish a US-friendly (or at least not confrontational), mostly secular interim military junta. That’s the only way out for them. And it’s doable. Trump would take that deal, and what are the clerics going to say? They don’t have any guns.
They could also choose to fight. That’s not out of the question, no? You can’t annihilate them from the sky. You’d need boots on the ground. And if we put boots on the ground that’s a whole new ball game. We no longer have the appetite for body bags the modern battle field requires. Russia is losing 30k soldiers a month, allegedly. What if we lose say 5k a month? Can we sustain that? Politically of course. I think the answer is a resounding no.
So you’re Iran, you escalate this. Spike oil to 150 and wait for TACO or GCC and Europe to squeal. That’s their only way out. The other way out is becoming something like Lebanon and losing sovereignty.
Going full circle to the maybe they choose to fight thought. People really hate being bombed. That doesn’t soften attitudes.
We dropped the sun on two Japanese cities before they unconditionally surrendered. Before that we literally set Tokyo on fire and they didn’t quit.
I am not sure if “boots in the ground” are how wars are fought anymore.
That’s the last battle from the last century.
Ukraine has shown the world a new way to fight. They are manufacturing about 5 to 10 million drones per year.
That’s how wars are fought now.
You step out of your foxhole to take a leak, and there’s a drone there waiting for you.
We’re in a new age of warfare right now.
It’s all about semiconductors and electronics.
The thing is, aside from Russia and Ukraine, nobody has really fully integrated this new way of fighting into their armies.
The US is behind the curveball, as is China, and India, and everyone else.
I’m not even sure that the aircraft carrier is a viable weapons platform anymore.
I think where it gets interesting, is it if the US says, “you know what, we’re going to manufacture 5 million drones next year, we’re going to do it in a cost-effective way, and we’re going to use those drones in a way that no one has ever seen before”. (To what effect, I don’t know, but this is needed. If you’re going to have the most powerful army in the world, then it better be up to date.)
I don’t want to carry this analogy too far.
Obviously the f-35 remains a very effective weapons program.
As do the submarines.
The aircraft carrier is not quite yet obsolete, although it requires tremendous support in order to protect those ships.
Against an adversary like China, I’m not sure the aircraft carriers would not find their way to the bottom. I truly believe that anything that’s that large, and slow, and easy to find, it’s got a problem.
The future is sensors everywhere, stealth everywhere, coordinated integrated intelligence, and long-range attack capabilities.
What a dangerous time we live in. This could all get very ugly.
I have watched a lot of video footage of the conflict in Ukraine. It’s not that there aren’t plenty of boots on the ground — and now plenty of boots underground too — but the drones just make it so difficult for either side to make any progress. With tanks and planes rendered essentially moot, it is like they are back to WWI trench warfare, and that is in mostly wide-open terrain.
Can you even imagine what door-to-door fighting in a major city in Iran would look like with the addition of suicide attack drones on both sides? Our casualties would by far worse than in Iraq. Let’s hope it does not come to that.
It might have helped to get a timely solution for the Iran Problem ifTrump, Rubio or someone had told the Iranians how they were supposed to accomplish the regime change necessary for the bombing to stop. Good luck to the Persians. They’ll need it as they have no way to convene anything. The IRGC has shut down electronic communication and Israel has made it a death wish to meet in person. The current plan has been designed to fail thus far. Until the bombing stops and the Iranians can talk it over, there’s no way for this war to end. The Donald’s war team got too worked up about blowing things up (Bibi’s way). They should have stopped at that point and let events percolate, if only for hours. Now we’re apparently committed to keep bombing for a month. Pray tell what a list of those targets looks like. So far Popgun Pete’s strategy seems to be ‘do 10% more damage every day until they say uncle’. And hasn’t this war already been proclaimed ‘the most bestest military campaign ever’. The coach might have to go.
I have a serious question which I’ll post in farcical terms. How ideological and fanatical and willing to die are the IRGC? On a scale of 1 to 10, where 1 is Do-A-Deal-Delcey and 10 is Yahya Sinwar, let’s say.
And all the Venezuelan oil isn’t speeding toward the refineries yet? time to fire somebody!
“Never underestimate desperate people. You never know how far they will go to get what they want.”
This quote could be attributed to Trump as much as it could be to the IRGC.
The IRGC is not going to give up power willingly, they are unopposed to violence, and they would relish damaging or destroying any targets going through the strait.
Trump opened Pandora’s Box, he can’t TACO this one, but he’s desperate to restore energy prices. He’s not anywhere near where all of this is happening and cares little for other people’s sacrifice or pain.
This is not going to go well for anyone.
Anonymous Blogger – That pretty much sums things up, no?
Ever since the opening day of the first Gulf War, US investors have been taught to view every offshore crisis as a buying opportunity. Rightly so, though it took a while post-9/11. (Anyone remember that?)
I may be overreacting, but this one feels different. Now and then expected investing outcomes do not play out as expected. It’s been a while since that happened so I guess Mr. Market may well make a cameo to remind us of the that?
I don’t think you’re overreacting. This is happening in conjunction with an impending employment crisis. Energy impacts all other prices and then we have record tariffs on top of all of that. Rate cuts won’t fix this and we can’t spend our way out of what’s coming.
I am surprised that the US, Israel and Iran’s neighbors aren’t working together to freeze financial assets of the Ayatollah’s family and also the IRGC. In other words, shut down the access to their financial accounts, as much as possible.
I have read that the IRGC relies heavily on crypto to store and transfer assets. Kind of ironic that Trump is pushing to legitimize crypto- when there are situations such as the IRGC using crypto to promote atrocities that Trump wants to shut down.
Dear Leader isn’t concerned with atrocities. The real Charybdis and Scylla for him are his ego and his wallet. Atrocities are a trifling matter.
Yep. More ugly. No way USN starts escorting tankers with the frequency necessary to solve the oil price problem. No way. Trump put himself in a metaphorical box–and some Americans in pine boxes. Trunp won’t admit he was wrong and time is not on his side. The level of arrogance necessary to believe, apparently, that Iran would simply rollover is hard to fathom.
Btw, only a fool believes the only assistance Iran is receiving in the ME and globally is from Russia in the form of intelligence for targeting (wpost article). It’s a free for all among nations, tribes, etc., looking at this through a selfish lens to help Iran.
Yep. More ugly. No way USN starts escorting tankers with the frequency necessary to solve the oil price problem. No way. Trump put himself in a metaphorical box–and some Americans in pine boxes. Trunp won’t admit he was wrong and time is not on his side. The level of arrogance necessary to believe, apparently, that Iran would simply rollover is hard to fathom.
Btw, only a fool believes the only assistance Iran is receiving in the ME and globally is from Russia in the form of intelligence for targeting (wpost article). It’s a free for all among nations, tribes, etc., looking at this through a selfish lens to help Iran.
The article and all these comments on balance do paint an interesting assessment of where we are headed.
Ek verstaan jou goed Ricus.
I believe the shipowners are reticent about using this facility from Trump , due to the unreliability of the US administration. Give with one hand, take the next and threaten continuously
If the US and Israel did go medieval barbarism style and flatten Tehran, with all the civilian casualties as a result.
Can only see an outcome where the USA Inc is severely damaged for a long time afterwards. Would China not be a more attractive buddy going forward for many countries.