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 new data shows the US and its Gulf allies are having more success in getting oil shipments through the Strait of Hormuz. We next review several other international and US developments that could affect the financial markets today, including the planned expansion of a major Canadian natural gas export facility and a decision by US artificial intelligence firm OpenAI to delay the release of its latest frontier model over safety concerns.

United States-Israel-Iran: New analyses from energy data firms such as Kpler show the flow of crude oil through the Strait of Hormuz and bypass routes has rebounded to 13 million barrels per day compared with roughly 20 million bpd before the US and Israel launched their war against Iran. The improved shipping conditions come as the US Navy and regional allies get better at protecting ships in the waterway from Iranian drones, missiles, and mines.

• The news has helped push global oil prices lower so far today. As of this writing, near Brent crude futures are trading hands at about $96.84 per barrel, down 1.0%.
• All the same, as the improved oil flow undermines Iranian leverage in the conflict, it’s becoming more likely that Tehran will lean more heavily on its regional proxies in Iraq, Yemen, and elsewhere to try to shut down the Red Sea’s Bab al-Mandeb or attack the energy facilities of US allies in the region. In our view, the conflict continues to present a risk to global energy supplies, the global economy, and financial markets.

Canada: Shell and the four other firms in the country’s flagship LNG Canada consortium have said they will double the capacity of their liquefied natural gas export facility in western Canada to 28 million tons per year, equal to India’s annual LNG imports. The move aims to capitalize on the way that countries around the world want to diversify their energy supplies due to the war in Iran and greater geopolitical tensions elsewhere. It also aims to reduce Canada’s dependence on exports to the US and make the country one of the world’s top five LNG exporters.

Germany: Many of Germany’s key industrial firms have reportedly begun to stockpile critical minerals that China might embargo in a prospective European Union-China trade war. Concerns about such a trade war have been rising since EU trade chief Maroš Šefčovič warned that Brussels would restrict Chinese imports into the EU if no trade deal is reached when he visits Beijing in early October. Some firms have built up enough inventory to keep production going for many months, but others are far behind, prompting one official to say the situation is “very tense.”

• We have long believed that countries and companies around the world will resort to this kind of stockpiling or hoarding as geopolitical tensions rise, global fracturing worsens, and international supply chains come under threat.
• Over time, the rush to secure large inventories of key commodities is likely to drive up global prices and push bond yields higher.

Australia: The Reserve Bank of Australia today hiked its benchmark short-term interest rate by 25 basis points to 4.60%, the highest rate since October 2011. Echoing the concerns of many other major central banks that have recently hiked interest rates, RBA policymakers cited persistently high consumer price inflation. However, RBA Governor Michele Bullock refused to say if more rate hikes would be coming in the future. In response, the Australian dollar has weakened about 0.5% against the US dollar so far today.

Turkey: President Erdogan this week is struggling to contain an $18 billion stock market scandal involving an alleged Ponzi scheme in which at least one high-ranking government minister is implicated. The scandal not only threatens to destabilize Turkey politically, but it also calls into question the quality of Turkish market regulation and the true value of Turkish equities.

US Artificial Intelligence Industry: AI model giant OpenAI last night said it has pulled the release of its next frontier model, GPT-6.1 Astra, saying it underperformed safety standards. According to OpenAI’s safety systems chief, the firm faces a “trade-off” between making models persistent enough to complete tasks and ensuring they follow their instructions. The new model “didn’t quite meet the bar” for staying within the bounds of its instructions, which could foster further safety concerns that might ultimately send the AI investment boom into reverse.

United States-Romania-Greece: US Ambassador to Greece Kimberly Guilfoyle reportedly caused a diplomatic furor at an official embassy event in Athens last March, when she hinted to Greek Energy Minister Stavros Papastavrou about an upcoming collapse of the Romanian government. According to the report, she also warned Papastavrou that, “We can do that to any country we want. We can do that here.”

• Shortly after the March meeting, Guilfoyle traveled to Romania and met with members of its Social Democratic Party (PSD), which subsequently pulled out of the governing coalition and voted with the country’s far-right to topple the prime minister.
• The report suggests the Trump administration may have actively undermined the government of Romania, a NATO ally, and is prepared to do the same in Greece. Therefore, the incident will probably further erode allied trust in the US and increase political and economic tensions between the US and Europe.

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