Hormuz: choking the Strait

Welcome to episode three of the assessment with me, Charlie Edwards. On this episode, will any major shipping line, Merck, Hapagloik, CMA, CGM or Costco, publicly announce a full resumption of regular commercial transits through the straight-of-all moves, but for the 31st of December, 2026. A fifth of the world's seaborn oil moves through a channel two miles wide as it's narrowest, and about 33 million containers are handled by ports around the straight-of-all moves. For a few weeks in June, it looked like a crisis between the US and Iran was easing. On the 17th of June, the US and Iran signed a memorandum of understanding to end nearly four months of war and reopen the straight with a 60-day window to negotiate a lasting peace. Britain, France and Oman agreed a mind-clearing mission. More than 10 European NATO members pledged minehuntas, and the first tankers began edging back in early July. On the 12th of July, Trump reinstated the naval blockade, declaring the United States the guardian of the Hormuz straight, and announced a 20% levy on all cargo passing through. Atoll, the International Maritime Agency called Unlawful. Iran, for its part, has threatened its own transit fees once the MOU lapses. So the commercial picture is still grim. Warris premiums remain many times their pre-crisis level. Mind-clearing will take months, and shippers face the prospect of two rival toll regimes on the same two-mile channel. The forecast you're about to hear wasn't from one analyst or a single model. We put the same question to the world's leading AI models, each reasoning independently then pulled their answers. The consensus? Unlikely. So the lower end of the artistic, around one in five, the crowd thinks the straight may quietly get busier. But a formal resumption, announcement before year end, well, is a 2027 story, not a 2026 one. To test that, I'm joined by two experts. Amir Hakeim is director of regional security and senior fellow for Middle East Security at the double i.d.s. and Elliot Hentoff is chief macro policy strategist at State Street Investment Management. Amir, before we get into the detail, a week ago we'd have been debating a reopening. So when Iran says the straight is closed, who is really speaking? The government, the revolutionary guard and the IRGC even want a deal to hold where it's a permanent standoff more useful to them. Iran once managed control of the straight. It doesn't mind if traffic goes through as long as its control of the state or of the straight is formally recognized. It's not about the money. It's about getting regional and international recognition for a kind of superior say in maritime traffic in the straight. In terms of financial revenues, whatever toll Iran can get, you know, the annual fees, they won't compare to the revenues that Iran can derive from selling oil at a higher end point. So it's not about the cash. The IRGC does not think about the problem the way President Trump would. With President Trump, there's a metric. There's a figure that informs everything. That's because he's a businessman and that's how he likes to think he conducts state policy. For the IRGC, it is about consolidating the strategic gains of that war. Hormuz is everything at the moment. Hormuz is where the IRGC pulled the ultimate trick on day one was able to sustain it, has created a loss of trust in America across its regional allies where Iran has been able to sustain the operational military aspect of things. So there's an inherent desire in the IRGC to do so. There are others in the system who will say, no, we should negotiate because it's by negotiating that we will consolidate those strategic gains. That, you know, we need to give up something. We need to to settle perhaps for something a bit mercier than the direct control of the state. So this is why the state. This is why we should talk to Arman. We should figure out something that is disguised as service fees and so on. That will not do, I think, for the most hard-line elements in Iran. Now, you asked the question, is it, you know, how cohesive is decision-making in Tehran? I don't think it's very cohesive, but in a way, it doesn't matter as long as Iran operates on third assumption that this is war. They are preparing for the next round and that, you know, internal dissent can be dealt with through deliberations or perhaps coercion. And so the net result is that Iran can still articulate a policy position and that we as outsiders, whether it's, you know, countries, analysts, private sector and so on, have to take that decision seriously. We can't assume that, oh, you know, they play hard, they talk hard, but they won't really play hard. The assumption is that actions will follow the declaratory policy. Okay, so you talked about Trump's 20% and that's before Iran adds fees of its own. So the straight may be open, but frankly, behind a toll-blast in a US warship, basically, does that make Elliot a normal commercial reopening less likely, not more? I can only tell you what financial markets are thinking and they do not lend much credibility to Trump announcements, per se. And they're less concerned about the friction and transaction costs that are associated with this. Even the previously muted levies that Iran had suggested, you know, 1% of the cargo values, that's all these are all very manageable amounts if you're talking about a restoration of or normalization of trade. The key thing to think about is more about what does normal look like in the post-war scenario. It will not look like the pre-war. We're not going back to a world where 120 ships go in and out of the straight every day. That's is not going to happen. And so best cases, we go back, basically, a full normalization to make up for the gap that we're missing would mean about 65% of shipping of pre-war shipping. Then we would be back to covering our bases of what actually has to be extracted. So again, less worries about the costs and more about where is the landing zone? And obviously, as an analyst, when I hear Emil speak about Iran's position, the markets see it more simplistic as eventually these positions will adjust to an equilibrium. An equilibrium will be maybe not the pre-war normal, but it'll be a new normal that the global economy can live with and where prices are within balance. But that assumes, of course, that the geopolitical status quo has to change because that position that Emil just outlined is not compatible with the current US position. So something's got to still give. Okay, so just focusing again on the market's own verdict of a reopening. What is the oil price doing at the moment? The oil price today is maybe not the most important. The futures curve, the one that's not exactly, but kind of telling you what will oil be valued a month, three months, six months from now, tells you that it should be lower than today. Meaning things will get better, they will resolve itself. The curve has climbed since the beginning of the war, I think, for year end. It's about at $75 last time I checked and a little bit lower for next year. But either way, it's saying this will get resolved in some way, perform R assumption as a market is eventually the reasons that prevent the continuation of the war will lead to some type of memorandum of understanding, some type of informal agreement, some type of equilibrium that allows for the restoration of trade to the curve. Okay, so Amille, let's just press on a point at which Eliot has just made, but you talked about in your opening answer is does the regime genuinely want a normalized rate? So that this, what is the more stable equilibrium for Iran that Eliot talks about? Does the regime theoretically want a normalized state? Yes, does the regime saying that this is achievable or an affordable future? No, because the regime proceeds under the assumption that this is a war that will take not many weeks or months, but years to settle. that concessions from the US will have to be extracted over time, same with the region, same with Israel. So it is going to be a negotiation through diplomacy and force. And the danger for the regime, or at least the hardliners within the regime, is for people to believe that there is a clear end to that, whereas actually you need the system to remain mobilized, you need to capture whatever resources you have internally, you have to maintain a resistance, esose, and so on to get there. The other point is more ideological. This is a regime that, on day one, suffered from a massive failure of deterrence. That war, according to the regime's multi-decade strategy, was never supposed to happen. They never wanted an old out war. But then they adjusted quickly, and they realized that they can come on top of the very war they didn't want. So it started with a failure, but then they figured out how to turn it into a success. I want to be clear, it's a success, it's not a victory. The regime will spend it differently. But then the question is, how do you restore level of deterrence? Because even the hardliners know that war itself is very difficult to sustain over time. So you have to think about your new position. And in the process, you need to keep people under our toes. You need everyone to feel nervous. You need to extract those concessions. You need to actually get the other sides to accept the new normal. And when I say the other side, I mean the Gulf States, the shipping companies, the energy companies, and so on. Not everyone will adapt as quickly as the financial markets or make their peace with that. You know, they already were talking about multi-year, multi-billion investments and bypass infrastructure and redundancy and resilience across the region. This will take a long time, and the regime will want to shape whatever is done. It's a mirror-broke. Well, what you just said is they want people to be nervous. In my world, that means risk premium. When the MOU was signed, the markets basically were like, hey, this is done. This is a peace dividend. They cashed the full peace dividend. But that they clearly were not listening to you. One party does not want participants to perceive this as stable. They want a degree of uncertainty, a degree of a risk to be priced into the future. That's point number one. The second point is by doing so, by embedding risk into what is a regular show. You are encouraging substitutes. And by encouraging the substitution effect, you're reducing the deterrence weapon that you have. So there's an interesting timeline here. I mean, I always say peak Iranian power was spring 2026, because that was the peak value of the straight-off hormones. The straight-off hormones will never be as important as it was just a few months ago. The second point is that its value is declining every day, which is an interesting component. Now, it's still very critical. It's still a powerful weapon. It's still really a bargaining chip that the IRGC holds and is wielding very effectively. But it's won a little bit like an ice cube. It will melt over time. Just very slow. I hope our listeners work this one through. So we have got a straight-offness declining in value at the same time that Iran needs to rebuild its deterrence capability. Whilst I'm assuming that we are trying to create a safe straight, how do we do that? Well, for Iran, the straight is part of the equation. It's not the whole equation. You maintain the deterrence by preserving the option to inflict a disproportionate cost on the Gulf States, on their infrastructure, on their geochonomic positioning, on their relationship with their key partners and so on. And obviously there are US military installations in the region, but I don't think they count as much in the sense. You know, when Iran decided on the 28th of February to go all out because the first, the opening salvo of the war took out the supreme leader. They said to themselves, this is an existential war. The straight was the way you impose a cost on the global economy and going after the Gulf state was the way you bend them. Essentially, you make sure that they don't support the war effort that they actually start competing with Israel in the US to obtain a de-escalation. So they're not yet bereft of leverage. I fully agree with Eliot. Iranian power industry has peaked and it will never be the same again. They have other options and keep in mind that the Iran has surprised us because of the lessons that learn from the Russia Ukraine war. It has adapted. It has a spousal of those lessons very quickly. It has been ruthless. And it may stay ahead in this technological race. So we're talking about bypass infrastructure. It's not sure that the bypass infrastructure will be immune to future. Iranian mischief to be polite. I mean, you know, the Iranians can will seek to continue in flicking a significant cost wherever whenever they can. I think it's important for the listeners to understand this. There's two forms of Iranian successes in this war. One was the ability to affect traffic in the war moves straight, which is what we're talking about. But the other probably more powerful one was the ability to maintain missile and drone fire that was targeted that was inaccurate all across the Gulf. That latter part strikes me as the more powerful deterrent. So at some point, wouldn't that incentivize the regime to go a bit softer on the horn was waterway. In order to basically preserve that because obviously the status quo is is eroding everybody. I think this is entirely possible once Iran's leverage has been recognized if not formalized by the region, you know, Iran wouldn't mind make a concession out of magnanimity at some point later when it obtains a security guarantees it has the Gulf states essentially Boeing and to to Iranian wish strategic wishes and so on. We're not there yet, but I think it will be part of the mix. They will be trade offs in it. But you know, this is this is many years ahead in you know, I think fundamentally Iran is after deterrent what the US will not provide Iran is a security guarantee. The US does not do that and even if it did Israel will not honor any security guarantee offer to Iran right so if you're sitting in Tehran. You need to maintain that the military deterrent not just the disruption or the you need to be able to impose a significant cost to the infrastructure to the leadership sites and so off the other side. So we'll see by the way how Iran is going to face a difficult situation in coming years big losses to the economy to you know the income stream and so on. How it decides to allocate the budget essentially will tell us a lot about how they're thinking about about the future where does the money go. And will as much go to the nuclear program as in the past or the missiles program how much is done in in the Gulf. It's I suspect the strategic debates in Iran have started there will be brutal because you have real corporatist ideological camps on on those issues. Can't really tell you just now how it's going to be play out but these are the two arenas where things will will be crucial. There is a there is an incentive for Iran given its budgetary crisis but there is also an incentive for carriers to come back is there not only given that all turn to the rooting is costly it's slow like that there has to be an incentive for them to return. I'm just wondering at today's premiums is the Cape D tour still cheaper than the almost respreen. I'm not a shipping expert what I can tell you is in those markets where the cargo is scarce there will be a high degree of tolerance for a big risk premium. And what am I talking about obviously we all know the oil market but we're talking about all the byproducts it's the refined products where there's a genuine global shortfall there's also other sources of inputs that we always forget that we we as consumers don't use much but you know a third of the world's helium important in the AI supply chain. We have a quarter of the world's aluminum we have special petrol chemical gas like you can propane about 40 45% so these are sizeable outages that cannot be compensated by supply chain reconfiguration and demand management elsewhere and for those therefore the shippers. there will be an attractive return to get any of these cargoes out and maintain a supply. And so I would say the baseline for that is they're happy to probably pay any risk premium pass it on to consumers that will just markets will price it. The question is, is it feasible? The problem with this straight-of-armouse issue is simply, it's the open or shut debate, can you actually go through? It's one thing if a ship are thought, well, all hundred ships and one ship may get hit. Well, that's a risk I'm willing to take. But if it's a, you know, each individual captain who's wondering whether he'll be able to phone home afterwards, that's a very different story. Okay, but if I understood you rightly, premiums could fall even while security stays messy. Because the market is going to price that risk accordingly, no? Yeah, well, I mean, the actual value of the cargo, the more insecurity is, the more value of the cargo that it carries. So there is a paradox here where, you know, the best case for shipers is almost a very uncertain environment where very little happens, but high degree of uncertainty. That's the optimal. Because then you actually get cargo out at a real premium that you can then sell on. Okay, fine. So in which case, Emil, just following on from what Elias said, who is the guarantor? Is it the US Navy under Trump's Guardian policy or is it a nod from Tehran? It's the most confusing setup to be honest. If you are a Chinese tanker or ship going in with goods, will you trust the US Navy? If you are a, you know, a mirati operated company, can you trust the Iranians? But more fundamentally, both the US and Iran today are revisionist powers when it comes to freedom of navigation. Iran wants to pull impose a service fee and Trump wants to impose a levy on goods. This is at odds with our common, you know, decades, centuries long understanding of freedom of navigation. So the problem is obviously the US is the much bigger player globally. And so if you are a shipping company, a global shipping company, and you're looking at that, who would you want to accommodate more Iran, which operates only close to shore is a minor player in the global economy and cannot sanction you cannot push you out of its almost nonexistent banking system. I mean, you know, financial system and so on. Or the US. You're more likely to accommodate the US because it has global impacts. So the decision is not about norms or, or, you know, legal requirements and so on. It's who can hurt you more if you cross them, right? So we'll see very different behaviors, I suspect, in the straight. Different people will give calls to different groups to obtain different kind of guarantees when they go in and out. And that the strategic effect is, you know, on a global level, a precedent that, you know, can affect waterways elsewhere. But on a regional level, it creates a kind of uncertainty that will complicate the recovery and stabilization of the Gulf states, for instance, right? When you're dealing with that much uncertainty, I would, I don't see any of them as being a guardian at this point. Okay. So, all right. Well, Elliot, let me ask you a more difficult question then. And you can't sidestep this. Who is the more unpredictable? Is it Trump or is it Tehran? I think it's easy to be blinded by the vagaries of Trump policy. And the US as an actor, as a global actor is evolving away from the rules based order that it helped create and maintain over the past decade. But I always, I always remind listeners that we associate tariffs with tariff man, which is obviously a K Donald Trump, but not a single tariff was removed during the four years that Joseph Biden was in office. The number of sanctions, the total quantity increased during the Biden years in quality, they also increased. So this is more systemic. Obviously stylistically, Trump is in a camp of its own. Addicted ability or creating the aura of unpredictability is part of his brand, part of his method. But I would not let the distract from us ultimately that Trump pursues strategic objectives. Those strategic objectives are aligned with non-Trumpian American actors who will carry on that legacy, both in his party and in the other party for the far West. So ultimately, I find the US remains in the long term a predictable actor. But so does Iran. Iran is a long track record of being very predictable. It sets out its ideological objectives very clearly. It pursues them fairly consistently. Emil can probably give you a whole outline of Iranian strategy over the last decades. And one thing that sticks out is actually very consistent and very predictable. What's not predictable is the combustion between the two. OK, so in which case, given this unpredictability, this uncertainty, I see that DP World is now and talks to build a new container port at Fugera on the Gulf of Iran side, Herpes built to move cargo without crossing hummus. So if the region's biggest operator is spending hundreds of millions to route around the straight, doesn't that lower the odds of anyone announcing a full return through it? So why declare a comeback when you're actually building the bypass? The first point is that it will take more than a year or more than the end of 2026 for these new facilities to be functioning at a level that is significant. Jabal Ali is an incredibly sophisticated operation. And they do it again, yes, probably, but it also took a long time to get there. There are lessons learned. There's talent, there's capital, and everything. It's just not going to happen immediately. The second point is this was expected behavior on the part of these quasi-state actors. They need to build redundancy resilience. The shock to the region is second to none. I would argue this is the biggest shock to the region since their establishment as modern states. The third point, however, is that if you announce that you're creating this kind of redundancy, you're essentially admitting that things will never go back to normal, which is fine and fair. But then it creates questions about the operations of these new facilities. Who get privileged access to the new port? If you are an operator, why are you directed? In the past, the things were simple. It was a commercial logistical imperative that set your behavior. It may no longer be the case. There are other elements to consider. It may be that the operator or the state will decide what's important. It creates additional uncertainty in terms of business operations. All this adds up to a very complex, confusing picture for state, but most importantly, the private sector. Given that it is an increasingly confusing picture, Elliot, I'm interested that Costco has been flagged as the plausible first mover, given its alignment with Beijing and earlier selective transits. Is the question, if a Chinese state-link carrier declares first, do you think that counts as sort of genuine normalization or is it a political signal that Western lines precisely won't follow? That is an excellent question. I don't know the answer. I could just point to some big surprises of Chinese behavior in the last few months, which is that China came to the rescue of a global economy. That's what happened. They basically bailed us all out. We were missing about 8 million barrels a day of crude, not talking about the refined products. And China shrunk its import by 5, 6 million barrels a day. And we don't even know fully how they've done it without having any visible economic reportcussions. The bulk of the outage has basically been salvaged by China probably drawing down a mix of its reserves, but also shifting to electrification and other means. However, they've done it. It's been remarkable. They did it quietly. They didn't trumpet it. But fundamentally, they facilitated the outage and diminished the Iranian Hormuz weapon. I totally agree with you. China was the unlikely savior in a way during that period. What makes this even more astonishing is that China militarily, however, was backstopping Iran provision of satellite, of imagery, probably of components, of data that was quite useful and so on. So, you know, In the early, the first few weeks of the war, the view on China was quite grim. Why are they not stopping the Iranians? Why are they helping the Iranians and so on? And then you take the longer views that, well, the Chinese essentially reduced Iran's leverage by preventing the explosion of a full energy crisis with all the economic implication. I first think in terms of Chinese calculations, the Middle East is important to China, but as someone said, it's the most important of the unimportant regions of the world for China. This is not a priority. What they wanted to do is to avoid the shock, not to obtain some geopolitical gain or anything else. So the second point is that the Gulf states matter to China more than Iran in the greater scale things for a number of reasons. Energy, trade, investment, and so on. I mean, for all the talk about this alignment of autocracies coming together, I think that it's more complex than that. Obviously, the Gulf states themselves are not democracies. So you can put it-- but you don't see this massive strategic investment in Iran as the pillar of some Chinese strategy in the field. If a Chinese shipping company were to go in and say, things are normal, I would assume that just before that, there was a phone call from Beijing to Iran and say, we're doing it. Don't mess with this. Take credit if you want. We're making you look good and so on. But I don't think that this is for the next six months. This is not-- I don't expect such a development anytime soon, because this war has still quite a lot of fuel in it. OK. It's actually hearing me talk. You realize that it would be quite a bold statement by the Chinese in a way that they haven't participated or vocalized thus far. And hence, when that happens, it will probably happen in an environment where shipping risks have declined materially. So maybe that is an environment where Western shippers could follow suit. It's hard to see it in an environment where it would be completely out of the thinkable for Western-- It would have been China first, West, the West second. That's the case. But not China first, and then a year later, the environment will have calm down, normalize enough that, OK, China can be the first mover. But it's not going to be the trade blazer, like going where no one else wants to go. Yes. OK. Understood. Well, let me slightly-- well, let me overcomplicate matters, because it may be the case that the straight doesn't reopen in the next six months. But what will happen in the next six months is the US midterms. What single event or scenario between now and December is most likely to either lock in an announcement that there could be a resumption in these shipping lines. From a financial market perspective, there's actually very clear trip wires. The number one is the bond market, basically the financing costs for the US government, but by extension, also other governments. We've seen in the past that that trumps, U-turns do correlate very much with high levels of bond yields. OK. And the bond yields obviously have function of oil prices being one input or overall fiscal costs, both from warfare, but also from higher energy prices that would filter in to that. So that's a clear trip wire. And by the way, we're not far away from levels where that's happened in the past. So if you look at bond yields today, we are in elevated territory. So it doesn't feel like there's a lot of space to move further. That would be my market signal. I don't know if Emilio has been qualitative once. I-- You know, I'm looking at the negative scenarios. Yeah, first off. OK. I mean, given the increased risk-taking behavior in the region, I think it's not beyond reason that there will be some massive accident. It doesn't have to be fully intentional. But a catastrophic explosion, tankers don't explode, because it's there to have it, typically. But large level of casualties that will capture everyone's attention. And God forbid, a mass casualty event either in the Gulf States or in Iran. I'm talking about civilians. I'm sorry. The problem today is that we think that everything is in a way well choreographed. The targets are well understood and so on. We normalize that we've adjusted to it and so on. This is still-- we're still seeing some of the most intense exchanges of fire. And things go wrong. And actually, since one thing went wrong on day one of this war, when the US hit that school and killed 180, 200 kids and teachers and so on, a repetition of that anywhere will bring back I think the risk and will have people sing very differently about it. So far, gladly, the Gulf States have not suffered any of that. But that would be almost a stretch. OK. So as described to me by a trader the other day, we are in miscalculation space. Yes. OK. So before we wrap up, I want to come back to the probability. The consensus going in was unlikely, so around 1 in 5 to 1 in 4, I guess. That was drawn from independent AI models, each reasoning through the evidence from scratch and it rests on a simple logic. Even if the straight gets quietly busier, a formal unrestricted resumption announcement clears a much higher bar than mere traffic returning. So we've discussed the arguments. You've tested some of the assumptions. You've pushed on the scenarios that matter. So we talked a bit about mind clearance, insurance, Iran's fees. And there I say the wild card of Costco. So let me put it to each of you directly. Does unlikely still feel right? Or has anything you've heard today actually move that up or down? Elliot, why didn't you go first? I would say it feels right. I would add one nuance. It feels right for cargo shipping. I actually think for crude oil transport and for the petrochemical complex, they are, I think, the odds of a formalized recognition that things have normalized is higher than just simply unlikely. OK. Great. Thank you. And a male. Finally, what is your assessment? I think unlikely is the right call at this point. If anything, we saw the optimism after the first ceasefire and the MOU rise relatively quickly and then be deflated by the fact that the fundamentals of that conflict are still very much out and that the parties still have what it takes. The biggest thing that could change all that is not really a change in behavior in Tehran. It's President Trump rethinking it all. One way or the other, it could be about legacy. I want to try to win big. And I'll put in whatever is needed into that space. I made my peace with the fact that I'm not going to win the midterms that all prices haven't gone out. There's way to rationalize it. Or the other way around to say, there is no victory to be had. That my part, I destroyed all these things. That's my gift to the region. Go and figure it out. Thank you to both my guests, Emil Hockim and Elliot Hentoff. You've been listening to the assessment from the double I double S with Charlie Edwards for costing risk, measuring uncertainty, subscribe wherever you get your podcasts.