by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the war in Iran, where President Trump has announced a new effort to “guide” ships through the Strait of Hormuz and unclog global energy and commodity markets. We next review several other international and US developments that could affect the financial markets today, including a statement by the OPEC+ oil cartel that it will slightly increase production to help ease prices and new reporting that suggests smaller US firms will be largely unable to access refunds for tariffs paid over the last year.

United States-Israel-Iran: President Trump yesterday said the US Navy will begin to “guide” ships from certain countries out of the Strait of Hormuz today to unclog global supplies of oil and other key commodities. The proposal essentially involves setting up a coordination cell to collect information from shippers, insurers, and militaries on mines and other dangers and to recommend safe routes for vessels. However, it’s unclear how many shippers would risk their vessels without US Navy ships as escorts.

• Meanwhile, Iranian media has reported that a US Navy ship near the strait has been hit by missiles. US Central Command has denied the account. Nevertheless, the report has put the oil market on edge and helped push oil prices higher early today. Near Brent crude oil futures prices are currently up some 3.4% to $111.80 per barrel.
• In any case, it appears that Iran is continuing to attack just enough vessels around the strait to intimidate shippers from trying to move through the waterway. According to UK Maritime Trade Operations, which is affiliated with the Royal Navy, a bulk carrier reported being attacked by multiple small boats in the waterway earlier today.
• Separately, Tehran said it has received a US counterproposal to its 14-point peace plan offered last week. A government spokesman said the US response didn’t bring up Iran’s nuclear program, but that seems as unlikely as the US administration’s frequent statements that Iranian leaders are begging for peace. In our view, the US and Iran remain far apart in the negotiating demands, so a near-term end to the hostilities is unlikely.
• Also, the White House said late Friday that it has approved $8.7 billion in emergency arms sales to Middle Eastern countries that have been targeted by Iran during the war. The arms sales include rockets to Israel, Qatar, and the United Arab Emirates and air-defense equipment to Qatar and Kuwait. The sales illustrate the increased sales that US defense contractors are likely to enjoy because of the conflict.
• As we had predicted, the Financial Times yesterday said investors poured $3 billion into exchange-traded funds focused on renewable energy in April alone. That highlights how the increased risk for fossil fuels transiting the strait is forcing countries around the world to adopt an “all of the above” energy policy, in which they support a wide range of energy sources, from Middle Eastern oil and natural gas to domestic coal and all manner of green energy.
• In the US, however, the administration is taking steps to stifle any further diversification in the nation’s energy portfolio. New reports say the Defense Department has stopped approving US onshore wind farms, citing national security reasons.

Global Oil Market: The OPEC+ oil cartel said yesterday that it will hike its collective oil output by 188,000 barrels per day, a token amount that follows a series of modest production increases over the last several quarters. The move is likely aimed at showing that OPEC+, led by Saudi Arabia and Russia, is unconcerned by the impending departure of the UAE from the main Organization of the Petroleum Exporting Countries. It is probably also meant to signal that the group is doing its part to bring energy prices back down.

• However, the move by OPEC+ is unlikely to have much, if any, impact on the world’s current oil supply, given that much of its production is still bottled up by the effective closure of the Strait of Hormuz.
• Separately, the UAE announced yesterday that it will spend roughly $55 billion to “support upcoming projects” intended to help it meet rising global oil demand. That announcement reflects the UAE’s frustration that membership in OPEC had limited its ability to monetize its oil resources.

Russia: The Financial Times reported over the weekend that security around President Putin has tightened sharply in recent months as Ukraine demonstrated an ever-increasing ability to conduct drone attacks deep into Russia. The report says Putin now spends so much time in underground bunkers micromanaging the war that he has grown detached from civilian affairs. The report suggests Russian security services have reason to believe assassination is a real threat to Putin.

• If Putin really was assassinated, it could spark a period of dangerous instability and political infighting in Russia as officials jockey for power.
• No matter what official ultimately ended up on top, such a development could well spark a sharp Russian intensification of its war against Ukraine.

Japan-MERCOSUR: Reports based on inside sources yesterday said Tokyo is preparing to launch talks toward a free-trade pact with MERCOSUR, the economic bloc consisting of Brazil, Argentina, Uruguay, and Paraguay. The move reflects Prime Minister Takaichi’s belief that Japan must expand its markets and diversify its supply chains for critical materials in response to US tariff policies and China’s curbs on rare earth exports. It also marks the latest effort by an ally to diversify trade away from the US, potentially undermining future US economic growth.

India: Initial results suggest Prime Minister Modi’s Hindu-nationalist Bharatiya Janata Party has won the weekend elections in West Bengal state, unseating the longstanding chief minister of the leftwing Trinamool Congress. The BJP also improved its position so much in the northeastern state of Assam that it will no longer need to rely on coalition partners there. The results show that Modi and the BJP continue to build power and remain firmly in control of Indian politics and economic policy as it deals with energy supply disruptions due to the war in Iran.

United States-North Atlantic Treaty Organization: The US administration late Friday said it will reduce the number of US troops stationed in Germany by 5,000, and President Trump on Saturday warned he may order even deeper troop cuts. The move is apparently retaliation for NATO allies in Europe refusing to take on more of the burden to resolve the US-Israeli war against Iran.

• A dramatic drawdown in US forces in Europe could leave the US unable to effectively defend its extensive political, economic, and cultural interests in the region.
• Any sign that the US no longer has the will or ability to defend its interests in Europe could eventually weigh heavily on the stocks of US firms that rely on Europe for sales, manufacturing inputs, or capital.

United States-Cuba: President Trump on Friday signed an executive order under which the US could block the assets of any foreign individual or entity operating in key sectors of the Cuban economy — including energy, financial services, mining, and defense — or providing material, financial or technological support to the government. The order would greatly broaden the US economic pressure on the Cuban government, potentially signaling the administration wants to shift focus from the Iran war to Cuba and raising sanctions risks on foreign companies.

US Tariff Policy: An article in today’s Financial Times shows that the procedure set up by the federal government to refund tariff payments ruled illegal by the courts will mostly benefit larger firms. According to the article, the administration’s website only allows the “importer of record” to apply for the refund, meaning legions of small companies that import through a distributor or other intermediary can’t use the system. The situation is further evidence of the broad advantage that large firms have amassed versus smaller businesses in recent decades.

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