Opinions

Between the Trump's tweets on Strait of Hormuz being open along with Iran's foreign ministry assertion that as long as US military blockade continues, SoH remains shut for all practical purposes. Today we have not seen any increase in SoH traffic. In fact there has been many U-turns of ships trying to cross SoH. So, while a deal appears to be in sight that may bring an end to the current round of US-Iran hostilities and relief to energy markets, it’s unlikely to result in a full or lasting peace. Israel does not appear party to negotiations and continues to regard Iran as a threat. Trust between the US and Iran remains low and already there appears to be different interpretations of key terms (e.g., Hormuz), all pointing to enduring tensions. Today we are witnessing Iran’s move to restrict vessel traffic through the Strait of Hormuz in response to the continued US naval blockade, undermining expectations of an imminent peace deal touted by Trump. We believe there are various threats to the market assumptions of a near term deal. These risks can be categorised into Israel, Trump himself, SoH traffic conditions & fundamental differences in Iran & US positions on Iran's nuclear facilities. We also believe Iran's neighbours namely UAE, Kuwait, Bahrain and to an extent Saudi do not want an Iran toll on SoH traffic. The current events can escalate further if Iran asks Houthis to attack vessels transiting the Bab al-Mandeb Strait, the southern exit route from the Red Sea and one of the two exits that Saudi Arabian crude exports can currently take. We continue to expect Brent in the range of $85-120 for next few weeks. We definitely do not see Brent sustaining below $85 as crude prices might be supported by purchasing for strategic reserves, a focus on resource nationalism and hoarding, and the logistical lags caused by the disruption.

It has been 35 days since SoH (Strait of Hormuz) has been closed. In the last 24 hours, only 5% of 60 day normal i.e. 7 ships were able to cross SoH. We decided to look at countries who are likely to face maximum pain in terms of crude & crude products. As inventories near critical thresholds, prices—not stocks—become the primary balancing mechanism. The effective loss of 14 mbd from the closure of Hormuz is so large that the market’s immediate adjustment mechanisms narrow to just two: inventory draws and demand destruction. For e.g. by May OECD inventory drawdown of 233mb might force it to reach levels of operational minimum after which demand destruction is inevitable. We also looked at various scenarios in which SoH can open up and how soon can the crude supplies be normalised. No easy answer but assuming a full opening of SoH, it might take 4 months minimum for OPEC supply to recover to 31mbpd still lower than pre war level of 33 mbpd. There are various factors at play such as shipping companies testing water initially, insurance firms lowering insurance charges & above all safe passage. But in the above case we are assuming: (a) all diversions away from the Strait are used and (b) Iran lets ships of “friendly importers” to pass the Strait, as reported in various media outlets. We are assuming that except US & Israel, Iran might let all other nation ships pass through SoH. But what if Iran also decides to stop ships affiliated to middle east countries from where US is currently attacking Iran. In such a snecario even after 4 months, there will be a permanent loss of 4-5 mbpd of crude & crude products. So while financial paper prices might react in a kneejerk manner and bring Brent to $85 levels, it might not sustain there as OECD inventories get refilled & Asian countries increase their emergency reserves. Hence, we see the new normal for Brent as $90-100 for REMCY26.

While markets and governments have largely focused on blocked supplies of oil and natural gas, the restriction of fertilizer threatens farming and food security around the world. Nitrogen and phosphate two major fertilizer nutrients are under immediate threat from the blockade. About half of Gulf fertiliser exports are destined for Asia, and ~33% of world fertilizer passes through the SoH (Strait of Hormuz). Key nitrogen and phosphate fertilizer prices have soared by up to 50%, threatening to lower crop yields and trigger higher food prices for consumers globally. Various measures of international food prices have historically shown strong correlation with crude oil prices; co-movements in both measures are largely synchronised, suggesting fast transmission from rising oil prices to food inflation. This is largely due to an equally strong-and-synchronised historical association between food and fertiliser prices, as fertiliser production is highly energy intensive. IMF estimates that a 10% increase in oil prices over the course of a year could raise global inflation by around 40bps. Crude oil prices are currently up c.40-45% since the war started, but this was only 17 days ago. But even assuming Brent settles at $85-90 levels, i.e. a 30% rise in energy prices implies a 120 bps rise in global inflation. Fertiliser affordability has already been deteriorating in recent months and quarters amid heightened protectionism from major trading economies. China’s nitrogen and phosphate exports remain much lower than the historical trend due to supply-chain security measures (e.g., for electric vehicle production). The ongoing tightening of sanctions and tariffs imposed by the EU on Russia and Belarus has also sustained high fertiliser prices from trade diversion. Then there is the risk of El Nino later this year which could negatively impact snowpack development (this has already caused crop shortages in south-central Asia in recent weeks, and the US in recent months). The US-based Climate Prediction Centre expect El Niño conditions with c.60% probability between August and October. To summarise, though fertilizer prices are currently below the peaks seen after Russia’s invasion of Ukraine, but grain prices were higher then, helping farmers absorb the costs. Grain prices are lower now meaning margins are tighter and farmers may have to switch to less fertilizer-intensive crops such as soybeans in the U.S. or apply less fertilizer, reducing yields. Lower yields lead to higher consumer prices via higher food inflation.

On 31st Jan we have released an opinion piece “Silver the pattern 1980-2011-2026 repeats again”. Silver was then trading around $85 levels. Friday’s close was around $67. Last week’s ferocious fall in both gold (10% WoW) and silver (15% WoW) has convinced us that we are headed lower for longer in precious metals. Gold’s pullback reflects a combination of profit-taking and liquidation amid concerns about less monetary easing. Slower central bank buying and outflows from exchange-traded funds have further weighed on sentiment. Bullion-backed ETFs are set for a third week of outflows, with holdings falling more than 60 tons in that period. With markets pricing in rate hikes across DMs, non interest bearing assets such as precious metals might fall further. Hence Gold might see more selling, and we expect a test of $4000 levels sooner than later. It is now a sell on rise market rather than a buy on dip kind of market. Silver might fare worse than Gold in the current downturn because silver is heavily used in industrial applications. Upwards of 60% of silver demand is industrial: electronics, AI chip packaging, solar panels, electric vehicle wiring, semiconductor conductivity, data centre contacts. When global growth slows down, silver demand also goes down. Also with the global paucity of Helium which is used in chip fabrication (wafer cooling, vacuum environments, lithography stability, leak detection) due to Qatar's Ras Laffan complex being hit (it supplied 30% of global helium supply), it is a matter of weeks before current stock of Helium runs out and chip production also starts falling leading to further lower demand for Silver. Hence we expect the current sell off to continue in both Gold & Silver with Gold eventually testing $4000 levels & Silver $50 levels. With central banks staying away from Gold & Silver being battered due to global growth slowdown, it is the retail crowd which might now be stuck for years with their purchases bought at far higher levels. This has been the story of precious metals since many decades as seen in 1980, 2011 and now 2026.

The current middle east conflict has impacted Asia ex China the most. The Mideast Conflict disproportionately affects Asia due to its reliance on imports of Mideast crude oil, petroleum products and LNG. Asia's relatively large net energy importing reliance, its large exposure to Middle East energy/fertilizer imports/remittances, and the region’s overall trade reliance exposes it to weaker external demand. Eurozone too has been impacted severely as 60% of it's energy demand is met through imports. In Asia itself, worse affected might be countries such as Japan, South Korea & India. China because of it's 1.4 BN barrel emergency reserves looks least affected. Amongst Eurozone, UK is the worst affected in Eurozone due to current Iran conflict. The current elevated inflation & fiscal constraints limit policy response to energy shock. US on the other hand is relatively insulated amidst the current middle east conflict. Linear models of the US economy suggest that even very large oil price shocks may have muted effects on the US economy. This muted impact was rationalized by the shifting nature of the US economy, namely the advent of shale energy production, which has made the US a major energy producer and exporter. For the Asian & Eurozone importers, the cost is not only being borne in crude and distillates. It is across chemicals, plastics, pharma & fertilisers supply chains. Brent prices are not even showcasing the real price shock to Asia as spot Dubai & spot Oman crude are priced $40-$50 above brent. Even if TACO happens, the spread might reduce to $10-20, yet assuming an avrg brent post TACO at 85, including shipping & insurance cost, landed cost of crude basket is $100 in best case compared to pre conflict levels of $65-70 levels. Asia & Eurozone are the two regions which will born the cost of the current conflict. The disconnect between futures which are underpinned by hundreds of billions of dollars of daily transactions and physical oil is partly due to aggressive US attempts to keep a lid on prices, including through releasing emergency supplies. The reality is that the global economy is suffering from a bigger inflationary hit than Brent futures suggest.

Since the onset of Iran war on 28th Feb, Brent has moved from $80 levels to currently $115 levels. It tested $120 levels twice in the last two weeks but any breach above this crucial level might bring severe demand destruction as well as the onset of TACO (Trump Always Chickens Out) trade. In this report we look how supply is looking across SoH (Strait of Hormuz) currently, increase in prices for various crude products, how demand destruction has already started happening & how a $120+ level on Brent can force Trump to call an end to US & Israeli attacks on Iran. It is another moot point how Iran might react to this development. Whether they continue keeping SoH on hold till their security guarantee demands are met or they allow SoH to open up as there economic threat value has no further justification. Currently the polymarket odds for the event ending by 31st March is only 6% compared to 24% last week. We see these odds as attractive for our view that the event might end by 31st March. Techincally SoH is seeing 16mbpd daily hit to flows which is almost 97% of normal traffic. The increase in spread between WTI & Brent could reflect that the market is upgrading its probability of US export restrictions. Dubai cash prices closed $54 above Dubai nearby futures prices yesterday, reflecting a large premium for “prompt” delivery of Middle Eastern crude. In contrast, Brent cash prices are similar to Brent nearby futures prices, confirming the extreme physical tightness in (Middle) Eastern crude markets hasn’t fully spread yet to the West. We are seeing sharp fall in refined product flows. Shipments from the region’s major exporters are down about 30% over the past 10 days versus the five month baseline, with preliminary data for the last week pointing to an even steeper 35% drop. The pullback is sharpest in jet fuel (down more than 40%), followed by gasoline (down more than 30%) and diesel (down more than 20%). Diesel has emerged as Asia’s importing nation’s immediate choke point, with surging prices slowing both travel and freight. In many crude importing regions, demand isn’t being reduced by choice but by the physical absence of inputs. We believe that if Brent averages $100 in March, the price effect alone would trim global demand by about 1 mbd in April— before accounting for additional losses from grounded flights in the Middle East and outright physical shortages. That is a global growth shock coming after the initial inflation shock.