The Pain Factor
🎧 Why markets anticipate a long Hormuz closure
After a long hiatus, I finally managed to record a new episode of the Energy Flux podcast.
This one is rather special – I was joined by Victor Ponsford, an independent energy strategic communications consultant, to discuss the unfolding crisis in the Middle East.
The conversation delves into the likely duration of the Hormuz closure, and why political and military factors are conspiring to keep this strategic maritime chokepoint closed for months rather than weeks.
We also talked about how physical and financial market players in the European gas market are positioning to manage risk and capitalise on the repercussions of prolonged loss of 20% of global LNG supply.
For me, the main takeaway was Victor's observations about the pain factor in diplomacy: how both sides must be hurting (militarily and economically) at an intolerable level before returning to the negotiating table. We have not yet reached that point.
We recorded the episode on Thursday 12 March, the day before the US military conducted what are claimed to be targeted air strikes against military installations on Kharg Island, the export point for around 90% of Iran's crude oil.
Kharg is strategically vital to Iran's war effort. If exports are impaired from Kharg, as appears to be the case, then questions arise around Tehran’s ability to sustain a war of attrition with reduced or zero oil export revenue.
At the same time, it is not clear that America can sustain its military campaign against an oil price spiralling above $100/barrel. Without the reopening of Hormuz transits, $200/barrel oil becomes inevitable. It is only a matter of time.
Thus, the war is firmly in the phase of delivering maximum pain to boost leverage and coerce the adversary into concessions first. It is sheer brinksmanship, and the stability of the global economy, lives and livelihoods the world over are all at stake.
Anyway, I found the conversation with Victor illuminating and sobering. I hope you do too.
🎧 Listen/watch on YouTube:
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🎧 Listen/watch on Spotify:
Have a great weekend.
–Seb
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