Strait of Hormuz and market implications (part 2)

Is this Iran-Israel skirmish just one of those prior ones that never go anywhere, or is this time potential higher for something more prolonged?

From a personal angle and tracking geopolitics very objectively: The escalatory elements in the region have never been higher than currently.

I want to start on this point because a question often arises: Why should we care if Israel and Iran have had many skirmishes in the past, none of which ever resulted in serious escalation, that could impact the global economy?

Two answers:

(A) One, this time we are in 4th turning (where conflicts are much more likely to happen), while 10 or 20 years ago we were in a different cycle of more localized conflicts (as typical for 2nd and 3rd turning, while 4th turning brings global conflicts). Therefore, it is a completely different geopolitical cycle.

(B) The second reason is the "escalation score".

I consider myself an objective geopolitical observer. No picking of sides. No skewing of data or conclusions. No perma doomsday analysis and no perma grass is green analysis either. Go by the facts, and let the data and cycle guide your conclusions.

When I say "escalation score", if you keep on a per-year basis everything that is happening from a geopolitical perspective in the region between the countries, and what other major powers such as the US or EU are doing in the region, it is no doubt that we are this time in a much more problematic environment with "escalation score" being far higher. This escalation score is pretty much the same as how I rate financial markets daily about market cycles. It's all about contextual changes versus the recent past. And some rigged clues here and there dont hurt either for confirmation.

The heat is on

In prior clashes between 1990s and 2023, sanctions on Iran were often applied. And often those oil sanctions were lifted, for brief period of time. Nuclear policy talks were launched, which had their setbacks and some steps forward. Some military skirmishes between Israel and Iran have happened in prior years for three decades.

But let's outline why in ALL categories, this time is much worse. Those are very brief summaries, if you want to research in-depth feel free to take a deeper look elsewhere:

-Oil sanctions in 2025 from both the EU and the US are at a higher scale than in most prior years. In prior years especially EU was still willing to import Iranian crude. In current times, most of the Iranian crude flows only to Asia. So two military powers (NATO and US), which are both on the side of Israel from a positioning perspective have no trade dependence on Iran anymore. Did you know that trade is the main lubricant of a positive geopolitical relationship? So when trade breaks fully countires are more willing to go into conflict with each other. From perspective of Hormuz, this matters.

-Nuclear policy talks have failed in recent weeks, and IAEA has pretty much-shut doors to Iran, concluding that Iran is indeed proceeding towards nuclear weapon development and not civilian usecase. In most prior years, the door was never fully shut, and discussions were ongoing, with Iran, the EU, or the US always taking one step back or one step forward, but never fully shutting the doors. This time, that's pretty much where it is. This leaves little room for further discussions. When rockets are already flying.

-Israel has launched limited military campaigns in prior years since 2000s on Iran. Either sabotage via intel agencies or direct military strikes, mostly smaller scale operations. The strikes we are witnessing now, are at a much bigger scale than any before, and most importantly, this time Iran is hitting back equally hard. This leaves the US in a lesser position to play a soft card on Iran, versus prior years. This leaves Hormuz card more exposed than before.

-Most of the prior years and prior skirmishes Israel was not engaged in war with multiple regional countries AND at the same time taking military operations on Iran. This time, that is the situation. This leads to much higher exposure, and more likely for the region to unite under the banner of Iran, leading to more escalation.

And keep in mind, in many of those regional ME countries where US has plenty of military bases. If those countries shift political stances and insurrection starts, who is to say that rebellion and insurrection against those US bases are not deployed, especially Iraq?

So when i say "escalatory score" is high, its by multiple factors taken it, the score is higher than it was 5 or 10 or 15 years ago.

For global economy and markets, this conflict is all about the Hormuz

While there is a significant amount of population, and military arsenal in both countries, none of this actually matters too much from the global market perspective (as that is typically the focus of my articles), because the conflict doesn't travel...unless there is something of a scale that can impact the global economy.

In fact, there are two components, one is a (A) socio-ethnic card, and another is a (B) Strait of Hormuz.

I won't go into the ethnic component and problems that globally clash between muslim and jewish population can lead to with those two countries in conflict, because that would divert the focus of the article, let's just keep it at the Strait of Hormuz.

The first version of the article with a broad introduction into Hormuz was written here, in mid-2024 if you want to check it out since the current article is add-to: https://www.tradethematrix.net/post/oil-price-surge-and-shakeup-of-the-markets-coming

Why did i write this article last year? Because i was convinced the skirmishes between Iran and Israel are likely to lead to something bigger, eventually bringing Hormuz into equation. Most of my geopolitical material is prediction based around the topics that will soon matter. I avoid doing content that has no application value, because there is already thousands of good sources elsewhere on that.

Four global trade arteries: Suez, Panama, Hormuz, Malacca

As already explained briefly in a prior article, Hormuz is one of the three most important global trade arteries. If you think about your body, there are thousands of blood vessels, and you might think that disrupting one of those can lead to huge issues, but usually body is pretty good at fixing localized vessel issues unless it happens to be one of the key veins or arteries that gets clogged. That is where the impact on the entire body is felt significantly. Global trade and supply chains work the same.

Thousands of global ports where goods travel from one point to the other, from seaports that are positioned around open oceans of African shores, to the seaports of closed-up shores in let's say Mediterranean Sea.

But regardless of where you sail the cargo and no matter what it is (oil, textiles, plastic products...), there is a good chance a ship needs to go through one of the global trade chokepoints: Suez, Panama, Hormuz, Malacca. This is because at some point the shipping lines concentrate on one of those "arteries" that they have to pass through to get to the desired destination. If you drive a lot, and live near one of those road "arteries" i am sure you know what is meant above.

Notice how global oceans are a waste space, but at some point, if a ship goes from continent A to B, there is a good chance it has to go through one of the 4 key chokepoints noted above:

Site that tracks realtime maritime traffic on the link to visualize from different angle: https://www.marinetraffic.com/ This is where strait of Hormuz now comes into play. This is vital route especially for global energy, because a lot of oil that is consumed globally is shipped through Hormuz on daily basis. How much? About 25%. If you are European or Asian, you are likely a buyer who needs third of his energy routed via Hormuz. But not just that, many regional countries in Middle East are largely dependent on Hormuz to be open and operational, because their GDP depends highly on it. Food imports and exports, goods of any kinds often for Middle East countries have to pass through Hormuz.

Or from another image perspective we can highlight how "thick" the arteries of global crude oil trade are, and just how big the Hormuz is versus the rest of global counterparts:

To put it this way: If Hormuz is closed, the Suez "artery" shrinks significantly as well. If Hormuz closes, the Malacca "artery" shrinks significantly as well. While it is true that oil-producing countries such as Saudi Arabia and the US can start outputting a lot more crude, they cannot cover the shortfall that would happen if Hormuz were to be fully closed down.

From another angle and image below, we have already ongoing disruptions in the Suez Canal, lasting for over a year. If Hormuz was to be closed, this would put a lot more strain on global supply chains, because Suez is already not functioning fully (nor is Panama due to drought). The delay times to ship global crude oil would increase. Suez Canal has been for a year under consistent attacks near Bab el-Mandeb Strait, diverting a portion of cargo that would have transitioned through.

What implications would there be for global economy and markets if Hormuz was to be closed?

Lets outline two scenarios:

(A) US+NATO close it down for prolonged time. (B) Iran closes it temporarily. (A) If Hormuz was to be closed by US and NATO, the implications could be manyfold:

-It could create a political-security situation where the region would restructure. US and Israel would potentially lose support in the region from all the surrounding countries IF the US Navy was to close down the strait (for reasons to apply economic pressure on Iran and diminish its capacity to fight Israel).

The consequences of such could be, that all those regional countries would rush to see Hormuz back open, and would seek quick military solutions to do so. And push any navy that is blocking it out. It would draw the entire region into escalation. And it doesn't end there. For China and other Asian countries crude oil from the Persian Gulf is of high importance. Closing the strait could push China into a much more hostile positioning against the US, to the extent we perhaps haven't seen the Panda react so far, it just might morph into Dragon instead. Closing the strait by the US and NATO therefore doesn't just leave the Middle East region in turmoil, but it travels to Asia geopolitically as well. It puts significant decision making pressures and "what to do about it" there as well.

But the above outline would only happen realistically in my view, if strait was to be closed for a while. Months, not weeks or days. Altough market reaction and crude oil reaction on first day of announcement would be potentially ballistic.

The economic (global) impact of closing the strait would be significant, due to energy flows that come out of the Persian Gulf. It would without question lead to a rally in oil prices. In fact, we already see oil prices rallying in a current clash between the two countries, potentially/partially because institutional capital is pricing in a small/medium probability of Hormuz being closed eventually if the conflict grows. Or perhaps it is an attack on Iran's oil-producing infrastructure that is mainly priced in? Most likely both.

Either way, the closing of Strait of Hormuz would lead to a rally in oil prices that we haven't seen since the 2022 Ukraine situation. But to keep in mind, this isn't just about oil. Lets not forget about the shipping rates, and implications on global inflation. In summary, it would be very inflationary for the entire global economy if Hormuz were to be disrupted but only of course, if for a longer period of time. A few days does not play a role (besides initial knee-jerk reaction), but a few months for sure. And we all know, that most serious military conflicts don't end in just a few days once two countries are officially in direct war.

(B) If strait was to be closed by Iran, implications could be in many ways similar and some different:

-Could/would Iran block the strait for just a little bit to test the waters? Could they threaten to close it, just to test the waters?

From a strategic perspective, Iran might as well blockade Hormuz, although in my personal view (which could be wrong) I don't think they would do it for an extended period of time. It would be potentially used to show the global economy a "preview" of what would happen to oil prices and industries if Hormuz were to be closed for a while. It could/would be used as a political tool to divert European and US politicans from further applying military pressures on Iran.

If Iran was to leave Hormuz closed down for a prolonged time, regional countries would turn on it. While already in battle with Israel, seeking more foes in the region would be strategically highly risky. Because so many other regional countries are economically and GDP dependent on Hormuz to be functional, they would see such action of Iran as direct economic attack on themselves. It would also cost Iran a lot to close down Hormuz, because of how much of the internal state is financed via oil exports. Historically yes, such actions where nation burns its own food supply so that enemy army cant access it while residing on its teritorry (Romans vs Gauls on J.C. campaign) have happened many times. But it is to say, that it might not be the first option to go for.

Why is (in my view) the US/NATO closure of Hormuz more likely than Iran doing it?

We can use Ukraine-Russia as an example. Was the EU applying sanctions on Russia even though it was hugely against its own interest economically to do so? Yes, it did. Did Russia self sanction by cutting trade ties with Europe first, or was the Europe that cutted the knot? We can use Russia as replaced example of Iran in this case.

So based on that example, would it be possible for the US and EU to apply a blockade on Hormuz, and justify it as "necessary regardless of the price we pay" to the same extent as it was done on Russia? I leave you to answer that question.

Either way, I think both scenarios are possible, and it's likely that actually both are played out (first one then the other later on), but one is only short-term, and another gets to be applied long-term. Assuming, the conflict keeps going without the end in sight. If there is peace made, and deals brokered, of course, disregard anything said on the article itself and toss it into garbage.

It isn't just about the oil, shipping rates matter too for inflation.

As an example let's review the chart of shipping rates below on picture. As you can see the rates went vertical in the span of one month of 2024, when Israel and Iran sent an exchange of ballistics, even though at that point large scale confrontation was still not likely.

Why do shipping rates matter so much for global economy, or where is the issue in the first place, if Hormuz was to be closed?

The way how shipping industry works is that when a certain maritime route becomes under attack from pirates or state military, and one ship or more gets sunk, the insurance costs instantly rocket up.

Above the image, is an example of how much can insurance costs go up, not 2 or 5X, but numbers well above that when certain shipping routes become dangerous to sail through. The example above is when Yemen's attack on shipping routes started back in 2023. In reality what this causes is for many ships to divert. It's not so much the costs that matter, to pay more for cargo, it's that shipping companies just are unwilling to risk their ships and simply divert them to other routes instead if possible (if operating on flexible contracts), leading to a shortage of certain resources on the global market or longer transport times.

For example, if we take a futuristic scenario where a bunch of ships gets sunk in the Persian Gulf due to an exchange between Iran/Israel/US the insurance costs skyrocket, and many tankers would simply divert to different parts of the globe, doing business elsewhere. This means that technically if the conflict was to last, even if Hormuz wasn't to be closed down, such a scenario can happen, and lead already to the diverting of shipping lines.

Chain reaction:

Suez Canal's partial closing in 2024 has led to insurance rates spiking, therefore leading to the diverting of ships, and higher shipping rates. Which feeds into higher costs for any cargo globally to be transported, and eats into inflation.

If Hormuz was to be closed, we would see the impact on shipping rates once more, in a very vertical move type of fashion, but much bigger than the 2023-24 example. This would rally global shipping costs, and contribute to global inflation.

Let me put into this perspective why it matters: In 2020 we had an inflation rally, and one of the largest contributors to it was the disruption in global shipping supply chains and the costs associated with the rallying of shipping rates. This is why Hormuz matters for the shipping industry and the global economy for that matter. Lockdowns of ports in 2020 caused inflation surge via less supply of goods shipping around the globe, and the need for ships to wait around the ports. The closing of Hormuz would cause the "lockdown" effect to very similar extent, except it wouldnt be fully globally but more regional.

Which sectors would be impacted positively or negatively from such an event?

Some from top of my head:

-Drones (positively)

-Shipping companies (positively)

-Oil companies in the west (positively)

-Consumer related sectors (negatively)

-Agricultural sector (negatively)

-Technology sectors (negatively) Some of those are obvious. If Hormuz is closed, oil flows are reduced, and any company that deals with oil extraction or transport benefits. From a market perspective, those companies should see in such events positive performances.

Drones would be likely widely used if the conflict between both countries keeps going, and most importantly anti-drone systems that some companies provide, via the use of AI would be even more in high demand. Drones are the next step in modern warfare, as they are cheap, sometimes untraceable, have a wide variety of applications, and are often cheap to produce. Those companies would likely see an upside in performance.

Agricultural sectors and companies with such exposure would see negative performance due to higher energy costs.

Technology is typically an inverse trade of energy. When energy spikes, the markets go into classic "sell the tech buy energy" via risk-off. Especially AI stocks that are highly energy intensive, but do not have their own generators would be impacted negatively. And there are quite a bunch of stocks currently up with such exposure.

Conclusion

Nothing is certain as they say. This Middle East situation can still go either way, altough in my view the rigged provocation elements are so high, so unmistakable that it is difficult to see a way out. The escalation score suggests that one should have a well-fleshed-out plan of what kind of market impact should be felt if we see Hormuz closed. And if it doesnt happen, there is no need to worry, as the plan does not need to be set into motion. It's about being prepared with a plan, and not so much about calling in advance certainty of events.

As I have pointed out already, we have over the past few years a very noticeable theme of key maritime trading chokepoints being clogged or disrupted. First Panama, then Suez, who is to say that there isn't a third one coming?