B (5:02)

Yeah. How much are we in danger of backward engineering kind of rationality over what might have been, you know, a quite a an idiosyncratic decision made by US President emboldened by events in Venezuela, his apparent, you know, belief in the US Military being, you know, and obviously a very, very tough cookie and his capacity to take out, you know, undertake these kind of operations. And at the same time, we've got, you know, there was sort of this opportunity when all the leadership of Iran was in one place. I mean, you know, it feels to me that you can kind of lay on layers of rationality about kind of why now, but there doesn't seem to be neither a clear case today versus the last five years for this kind of military strike and not for us to try and figure out the why here, but just to talk about it for a moment, nor an imminency other than an opportunity to take out leadership. I mean, and I say this in that that is a clear, that that is not a, a fringe theory. And that is one that, you know, presumably allies and rivals around the world will be potentially adhering to, which again means that the ability to predict the United States as sort of the paragon of international order and global free trade is just no longer fulfilling that role. And therefore you're just driving more uncertainty into not only how our rivals and geopolitical rivals act, the black boxes of China and Russia to an extent, but actually now the US sits in that category as well. That seems to me to have profound impacts.

A (6:47)

Yeah, it absolutely does. And as we've discussed before, the, the lesson from the last couple years is that when the US wants to execute this kind of daring operation in other countries, it can. The hard part about that, though, is what you do the day after. And unlike in Venezuela and unlike in June of last year when the US struck Iran's nuclear program, we've seen that the US can execute with its allies on these kind of daring missions to accomplish military and geopolitical goals. The problem is now, okay, what happens next? And Iran has to a great degree decentralized its military structure and has led to a degree of resilience, at least in Iran, defensive capabilities that is different from past escalation cycles.

B (7:43)

And this is the. And your colleague Neil at Ferguson obviously talks about regime alteration versus regime change. That's a lot more easy to do in a small country like Venezuela where you've got significant leverage over Delse Rodriguez versus, you know, the irgc, which as you say, is decentralized, you know, an entire 50 year construction around its power and ability to maintain power.

A (8:10)

Yeah, that's right. And you have a ideological and religious aspect that is not, that is much stronger in Iran than in the case of Venezuela. I think you can quite credibly make the argument that for a long time the ideology of the Venezuelan government had been self enrichment with communist and socialist characteristics in its public remarks. But there's really an ideology of self preservation and self enrichment there. Whereas in Iran there is a, whether you want to call it religious, whether you want to call it ideological, there is a fundamental and much, much deeper battle at play, both as it relates to the US and it relates to Israel. And I think the hard part now for the US on the global stage is that while our allies, and in many cases countries that are not necessarily US allies, as we've seen from China, are going to help in the near term, it's all hands to the pump in terms of sending military assets to the region in terms of freeing up the Strait of Hormuz because everyone loses in that scenario. The question of there will be diplomatic blowback, although I would suspect that was well understood before the US took the decision to strike.

B (9:32)

Okay, so let's zoom in on. You know, we're not going to get a, that's a fantastic discussion, but not one for right now the long term sort of political consequences of this. But certainly there are impacts in the short and potentially even the long term as it pertains to commodities and obviously the Straits of Hormuz, but also sort of other non linear impacts as well. And I guess the key point here is with regards to length and duration, the enemy has a vote here. Right. You know, the US might want to declare victory, but that, you know, as long as Iran has the wherewithal, that is the stockpiles and it seems obviously the shahed drones are the ones that have sort of the, have been getting through and they're much easier to make and easier to deploy than some of the other ballistic missiles, you know. But the point being Iran can continue to do this as long as it has the wherewithal and the political will to do it, irrespective of what the US decides to do. And there's sort of a, this is sort of a battle of missiles and stockpiles to a certain extent. But you know, where are we at right now in terms of the Straits of Hormuz and you know, when. What is, what sort of point does, is in your analysis, does this start to get really very painful? And why.

A (10:46)

Yeah, it's, it's the key question, Paul. Look, where are we? Very, very few tankers are transing the straits. We've seen data that imply there might have been some transits over the past 36, 48 hours with tankers turning off their AIs and making a run for it at night. But a handful, if any, have succeeded in doing that. We've had at least five likely more strikes on tankers, some of which were anchor, some which were attempting to transit the Strait. So the straits functionally closed for now both to oil and to lng. And quite importantly it's also closed to Iranian shipping. So the vote that Iran has exercised, if you will, has been to declare the Strait closed and back that up with missile and drone attacks and also to hit Gulf energy infrastructure. The response to, based on the centcom, IDF and other other public communication has been to hit Iran's offensive capabilities in country extremely hard. Not just its naval assets, but also to focus on its Munitions facilities, its existing air bases to hit its air force, to maintain air superiority and keep striking both political and military targets in country. To that extent, you're looking at a world where Iran's ability to conduct offensive salvos is much more limited. It's harder to limit the drones both because they can be sent from smaller and more mobile launch sites. But what we're seeing is smaller Iranian salvos than we saw the first night of the war and certainly in some of the past waves of attacks at Israel and at regional facilities. The problem is it's extremely expensive to, and you work down your munition stockpile to take these assets, to take these Iranian missiles and Iranian drones out.

B (13:06)

Yes. Like a $20,000 for a shahed or whatever versus the 3 million, whatever you're spending on the smart missile to take it out.

A (13:15)

Yeah, that's right. And that's been playing out in Ukraine given both the shaheds that Iran sent to Russia and Russia's domestic program of shahed manufacturing for the last four years now. So it's incredibly difficult, as we know from Ukraine, as we know from data in the Middle east of strikes. It's really hard to stop a large drone swarm. Some military analysts think it's a lot easier to stop a smaller one. And if that's the case, we'll see, we'll see much less damage done in the region in coming days. I think it's also worth, worth touching on the history here of how the Strait looks and how the Strait moves in times of crisis. It's not the first time we've seen something like this. If you look at the tanker wars of the 1980s, there are over 400 attacks on commercial shipping between Iran and Iraq from 1984 to 1988. And around 1 to 2% of tankers passing through the Strait were hit. The numbers now have been a little bit higher in terms of percentage of tankers that have been hit, but we have, we have a good, good slug of evidence from a four year period that at the right war risk premium and with the right military support, tankers will run the Strait even, even, even, even at great risk to their crews and, and, and to the ships themselves.

B (14:45)

Yeah, I mean, so much of this is ultimately going to be about how duration. Right. You could take that narrative of slowing missiles as depleted stockpiles down or we're gearing up for the long term here. Right. I imagine that the impacts of this start to grow exponentially, you know, in, in along with time. Right. In other words, for a week Everything's kind of manageable. But we suddenly think about four weeks or three months, suddenly things start to impact seriously and cascade.

A (15:14)

Yeah, that's right. And if you look at where the market is, it doesn't seem like it's pricing. A, a long interruption to Hormuz traffic. I mean if you think about how much price has moved in 1973 for an embargo that lasted a period of months, I mean oil production in 73 recovered somewhere between six and eight months after the initial embargo and prices tripled in a year. If you look at 1979, production again recovered in a relatively short time frame and you saw a much, much more violent move than you have in the last few days. So it's hard to look at the moves certainly in crude and LNG markets and think that the market expects a multi month, a multi month pause. We're already seeing production declines, not just flow declines. Multiple major fields in Iraq are offline. It's hard to see how much storage exists in the region. The Saudis and the Emiratis have ways of avoiding the strait through pipelines, but not enough to take all of their export capacities. So you're going to see further production shut ins. Those production shut ins are not of the kind that couldn't be turned back on in the very near term if the strait was possible and empty tankers were showing up at ports. But you've got to get tankers flowing for that to happen in the near term.

B (16:58)

I was speaking to a seasoned oil trader yesterday who was like part of that sort of lack of reaction is that there's quite a lot of oil on the water and the expectation would be that if things got straightened in the short to medium term, people might suddenly start disregarding US sanctions and take that oil anyway. Yeah, so that's sort of one, one thought there, I guess. The other is that while we're all laser focused on the Straits of Hormuz, the, it would seem to me that the, the, you'd start entering a new realm if those missiles and drones started hitting infrastructure on land, particularly in Saudi Arabia.

A (17:40)

That's right. And we have seen, we've seen strikes in Saudi already. The largest refinery in Saudi is currently shut down. The strikes in Qatar on the LNG export facilities are significant, although it doesn't look like they'll be shut down for, for an indeterminate period. Currently shut down perhaps because Qatar has a lot more control over its, its own LNG tanker fleet than, than some of the, some of the commercial fleets do. So you're certainly seeing impacts both both military and, and logistic on, on production in the region. It's not just crude and LNG either. Fertilizer obviously matters hugely. Sulfuric acid, a significant portion of sulfuric acid that's, that's used in the mining industry comes out of the Gulf. So, so it's not just a story of crude and lng, although those are the, although those, those make the most

B (18:52)

headlines and it's also a story of it going the other way. And I don't want to discount the impact on fer you raised there, which will have significant impact, you know, the longer this is shut down as well, two things happen. One is obviously there's a, there's an immediate critical, acute need for those Gulf states, the UAE in particular, Qatar, Bahrain, you know, how are they going to start feeding what are very large populations solely reliant on local trade if that does get shut down? Yeah, and then there's, there's a, I only talked about that. And then there's also a longer term one which is the viability of those as sort of these, the new entrepot of the global world, you know, sat right in the middle of all time zones and all the rest of it. That's probably not for now. But can you just, I mean, how acute could that get for those Gulf states as this drags on potentially?

A (19:45)

Well, many of these states have, you know, north of 80% of their food is imported. And as we saw in the example of the, of the blockade on Qatar, that can get quite nasty quite quickly. They also rely on sophisticated and fairly centralized desalination facilities for water supply that doesn't require tankers. But it does create another economic choke point. You have fairly good inventories in the region in the, on, on, on key foodstuffs in the sort of, to the order of multiple months of supply. Not dissimilar to the way in which oil importers manage their SPRs. But if this is a longer conflict than markets expect and the solutions being worked on in, in Washington, London and elsewhere to reopen, reopen the Strait don't work, then then you really do have to worry about, about food supply in the region. That seems like it may be solved by expats leaving in droves. And whether they come back is anyone's guess. But it's certainly, certainly a concern.

B (21:02)

I think it's, you know, we have colleagues in Abu Dhabi and Dubai that obviously we're in close contact with. But you know, it has, I think has come as a profound shock to that Population. I kind of want to come on to the broader picture of China and Russia and what they're thinking about this, but just staying on kind of the, you know, classic green mantle sort of game theory here, right. The, when you, we've sort of covered the, you know it's going to have, the longer this goes on, obviously the more profound impacts it has and the more deleterious it is in general to sort of the modern way markets are structured, particularly in the region, but potentially to the US's advantages. Right. In terms of LNG, export and all the rest of it. But in terms of game theory here, you know, it would seem to me that there's, there's, there's not, you know, there's a certain amount of, just from Iran's perspective is kind of they have to make this so painful that the US doesn't come back every six months and degrade or Israel, I should probably say come back and kind of degrade their capabilities. Right. I imagine at core here it is, you know, there is, there is not this, this isn't regime alteration. It's too far, too deep and you don't have a local population that's anywhere near capable of overthrowing the power of the state and the organizations they have. And at the same time they need to absolutely make this so painful that there isn't this continued degradation. I mean look back at the twelve Days War, so called, I mean this is just a continuation of that, right. This is essentially an ongoing hostilities that's now sort of in his second year. Is that, is that, that to me would suggest that the Iranians want to make this long and painful. And you know, and, and there isn't going to be a sort of a short end to this, God forbid, I mean, as in God forbid there isn't a short end.

A (22:56)

Right. And, and from the Iranian perspective, I, I think you can make the argument both ways, Paul, that the, that times on the side of the Iranians in terms of the mounting economic pain to the rest of the world. But you can also make the case that given the combination of sanctions and the aerial pounding that Iran is taking from the idf, from the US and others, that the longer this goes on, the lesser threat Iran is. And having taken the decision to bring the Gulf states into the war, you've created this alignment of interest between, between Israel and the Arab states around the impossibility of having the current Iranian regime in a stable region. To some extent, Iran's response has proven the hawks in Jerusalem and elsewhere. Right. It's very Hard to see the kind of regime alteration we saw in Venezuela where the next person up says, okay, we'll play by America's rules now. And while there's credible evidence that a majority of the Iranian population would, would be thrilled with a, with a new regime in place, they're not the ones with the guns. So the pathway to the day after is very, very complex. When the US government released its war aims in a communication from the White House, notably, do not consider regime change as one of the war aims, just a degradation of Iran, or I should say really a neutralization of Iran's offensive capabilities. But once you accomplish that, you've got to monitor it to an extremely, extremely granular degree if you don't want to risk this kind of strike again. And that's going to be the hard part. This isn't an Iraq style commitment to nation building, but it's going to be one that requires very, very careful monitoring, whether it's US led or whether it's some kind of joint task force. And unless there is a pathway to regime change that doesn't seem immediately obvious, that's going to take a very, very long time before anyone in the region can be comfortable.

B (25:38)

This doesn't happen again, which in turn, if you just think about those long term LNG contracts coming out of Qatar and so forth, those you'd expect there to be a significant repricing of those as the risks become clear and Iran essentially continues as before, more neutered in terms of offensive capability. But again, shahed drones are very, you know, they're making them in, you know, in tunnels somewhere. Right. As opposed to a full logistics capability required to make, you know, ballistic missiles.

A (26:06)

I gather there were factories as of a week ago. I don't, it doesn't look like they exist today, but I'm sure there are alternative options to make them. And a lot of the, you know, the IP and other shahed plants exist in Russia and elsewhere given the dispersion of that technology. So.

B (26:27)

Well, I think the IP is a 3D printed body, a lawnmower engine and a GPS kill switch. I mean again, I just, you know, and it determined Iran. You just does make you wonder about the, the longer term, you know, they are going to have to price this risk in if you don't have regime change and like stated regime change, this isn't Venezuela. And even then that wasn't regime change, it was regime alteration. You know, it just seems like this would be a, this is a, you know, this is something that's just going to Whether, whether there's a hot war, the risks are going to continue, because I don't. It seems to me that there's very little way out of this, you know, other than declaring it done and hope the Iranians feel sufficient pain at the same time to also call a cessation of hostilities.

A (27:14)

That, that seems right, Paul, to me. And the complexity there is. If there, if there was a figure waiting in the, in the wings who had made, who had, who had given indications to the US and others that they would be willing to be the Delsey Rodriguez figure, if you will, and participate in regime alteration, that person is either not in charge or they're dead or got killed.

B (27:43)

Yeah. And there are some rumors swirling around that that person did exist, but ended up getting caught up in some of the same strikes.

A (27:52)

Right.

B (27:53)

But, you know, okay, so, you know, and we, I think we all recognize this as a function of time. What does this mean when you're, you know, China and Russia. Right. Is this, is this, you know, let's start with Russia. Is this a net boon because oil prices are now at 80 bucks and they can start paying for the war again.

A (28:14)

Oil prices are higher. The question of sanctions enforcement, which has tightened materially in the last six months and caused a decline in Russia's ability to sell its crude, is, if not back on the table. The, the, the downside of, of export, of enforcing the existing sanctions on Russia is much more painful with where prices are today than. Than where they were two weeks ago. And you have a significant degradation of Western air defense assets. So the west will need to rebuild its own air defense stockpiles, not just in the U.S. but in the Middle east and potentially in Europe, as well as more European naval assets. Join the conflict. That's not a good thing if you're sitting in Kiev thinking through your own stockpiles. Moreover, I think you've got just less of a focus on reaching a deal between Russia and Ukraine because the full force and concentration of the foreign policy apparatus in pretty much every major capital in the world has to be focused on the Middle east for the foreseeable future. So Russia does seem like a winner from this conflict. The Chinese picture is a little more complicated because China's one of the big losers from Hormuz disruptions in pure economic terms. On the other hand, China has succeeded in an extensive campaign of rebuilding its building and rebuilding and depending on the specific commodity, its strategic reserves over the last few years. China's extremely well stocked. In oil terms, China's in a very good place on LNG and is less reliant on LNG than a lot of other countries in the region such that it's been able to release some cargoes this winter into higher priced markets. So China's absolutely challenged in economic terms, but China has a buffer to draw on that's the envy of pretty much every other major economy outside of the net exporters like the U.S. yeah, and

B (30:47)

there's also sort of the soft power thing here as well, which again is kind of the, the narrative of, and you know, the old, the old regime's over, it's now sort of power is important and all the rest of it and you know, and is Europe, is, is the equation of Europe, you know, not getting closer to China sort of starting to break down?

A (31:11)

Certainly could be. Although we've seen a pretty differentiated response in Europe between say Spain refusing to, to participate at all, the UK and, and France assisting in different ways. The EU is sending more of its assets to the region, having historically participated in tanker convoys both in the 1980s and at other times. I think the best analogy here to some degree is Covid. China's international reputation took a real hit when it was blamed for creating a very unpleasant global economic shock that left a lot of people dead. And we saw dips in the perception of China both both in polling terms and in terms of diplomatic relations and policymakers framing of it. And if, if, if, if things go poorly from here and we see a 1970s style crisis which can't be ruled out, the blame for that lies in Tehran. But it also, the proximate trigger was, was a decision taken in, in Washington and Jerusalem.

B (32:24)

Yeah, there's, there's so much to go on. But I guess I've got a couple of, couple of key questions. One would be from a commodities lens, do you think, let's say, let's just put a stake in the ground, right? So this goes on for another couple of weeks, slowly de intensifying and then some kind of accord is made and we live in another sort of simmering, you know, situation, but essentially an armistice. Do you think this, you know, what, if any, are going to be the long term ramifications of that scenario for the commodities world? And is this the sort of the straw that breaks the camel's back, not to use a pun, that kind of finally gets the world thinking about risk premium and geopolitical risk a little bit more seriously? Is this the US LNG export and shale gas high fiving one another and just, you know, we are the only reliable source of gas for Europe and our Asian allies or is this just actually ultimately and tragically and very terrifying for all of our colleagues and those people that this is kind of just another bump in the road of just a more volatile decade and century?

A (33:37)

Look to a man with a hammer, everything's a nail. So I think this will get people thinking more about geopolitical risk and geopolitical risk. But I would say that I think as we think about the commodity impacts that we can discuss with continents in the long term, There are probably three winners from this. The first, as we saw in 2022 are coal and renewables, especially in Asia, but globally it's the prioritization of energy security over in the case of renewables dispatchability and in the case of coal over environmental concerns. You'll see delays to phase out. You'll see doubling down on domestic power production. You'll probably see further investment into attempts to decarbonize some of the LNG use case of heavy industry. If you look at the Chinese trajectory for decarbonization of heavy trucking too, I think there's a case to be made that is going to push the battery rollout in what have previously been relatively marginal use cases. The third, which sounds contradictory to the prior two but isn't is uslng. We've seen such, well, we've seen a lot of complexity in the market. There are people talking about LNG gluts. It's for some of the projects coming online later in, in the 2000s and into the 2000s, I think there were some concerns around off take commercial viability. The, the diversification story there is is more and more compelling. You might also see a surge of interest in floating lng, both more so on the liquefaction side. But if you look at the need for new supply and the risk of putting very illiquid long term assets into hard places, that's one of the potential winners here.

B (35:58)

Yeah, yeah. This is. Mike Howard said, you know, actually the idea of having your own infrastructure, you can sort of move around the world and take it out of risky places is probably quite attractive and an episode that's yet to go out. When this goes out, we've just done on sort of US shale and actually even if you kind of X out, you know, some of the more aggressive AI power demand, you know, you, I mean there's, there's a lot of US LNG coming right. And yeah, it's sort of a fascinating story and this probably it brings both that flexibility, contract flexibility, but also, you know, it, it has different routes it can go. And yeah, it, again, it comes back to that risk Premier. Final, final question. What I kind of find fascinating here is, is the rise of polymarket and I'm not talking about, you know, government insiders making bets, but how the rise of polymarket and similar types of, you know, tools or betting platforms. How, how seriously should people take that as a useful predictor and indicator? Is that sort of. I'm sure someone set up Algos for when a massive sum of money goes on an event that they're going to bet on it. But like, you know, just like to factor that into, you know, how a risk consultancy like Greenmantle thinks about it.

A (37:24)

Look, the good thing about polymarket and the like is that there are a lot of insiders trading on there. The bad thing is that there are a lot of insiders trading on there. It's a useful information source. In general, there are reasons to believe it's not as accurate as conventional financial market pricing or well informed sources. But in some cases you see trading accounts that very much look like they knew what was going to happen before it happened. And if you can identify those, then it's certainly a compelling, it's certainly one compelling data point to use. I think there's no substitute for high quality human intelligence and understanding both political realities, game theory and historical inference. But the more data sources you have, you have the better.

B (38:37)

Yeah, fascinating. Just so we sort of put our sort of flags in the ground on this one. Obviously you see a lot of stuff in the Twitter sphere which, you know, it's gone slightly toxic and nuts to understate it, but obviously there is that narrative out there of this is the, the kickoff of World War III and obviously World War I started with a, an assassination that destabilized an entire region. You know, is, is there permutations and pathways to World War 3, a more globalized conflict? And certainly we think we're in a regional one at the moment that perhaps are being slightly underplayed or that risk hasn't been priced in.

A (39:20)

Yeah, I certainly don't think the markets are pricing World War 3, especially if one looks at US and global equity markets. I think the way to think about that, Paul, is that in some of these eras of rising historical tensions that predated world wars, you did have a lot of regional wars that if they didn't light the powder keg at a global level, certainly gave a sense of where things were going. It's, it's hard to see this spiraling into a world war because the interests of, of the two major powers are so aligned on ending this war in the very near term. And China's priorities lie, lie elsewhere than in, than in, in Iran. Iran's certainly useful for China as a source of discounted crude, but there's no ideological or political attachment beyond that, as we've seen from comments out of China in recent days. The more worrying question is whether the attention, the focus, the military hardware used in this conflict increases the probability of a Taiwan crisis.

B (40:39)

Yeah. Isn't available for Taiwan. And also sort of the moral high ground and all the rest of it. Those gulfs are sort of somewhat removed as well. But then. Yeah, I don't know. I mean, that's very hard to think about. Right. You've, you, you've seen some, there's a different pod. Right. We've seen some rage changes at the very top of the military hierarchy or the pla. It's hard to define what that means. You know, you've got obviously big, significant commodity stockpiles built up, but at the same time, you know, Taiwan is a long way away from China in kind of military terms and you know, it's too hard to speculate, but certainly I don't think this makes that war less likely.

A (41:22)

It certainly doesn't, although we are stress testing some of the responses and the ability to, the ability to project power both in terms of, both in terms of military responses and in terms of economic outcomes. The Carter Doctrine, at the same time as the Roosevelt Doctrine, if you will, while we were on this pod, the President has announced that he will have the USDSC provide political risk insurance and guarantee for maritime trade through the Gulf, which was, I think, shadowed in some of the news articles this morning, and potential, potential tanker escorts, although we'll see whether it actually gets to that. So it's safe to say this is only going to get more interesting from here.

B (42:14)

Yeah. Yeah. Well, that was something you predicted and it's in the notes in front of me and it's just, has just happened. So. Yeah, we'll leave that. I'm gonna go find out who builds and manufacture which public companies build a manufacturer interception missiles and go. And good man continue to invest heavily there. But on a very serious note, obviously, you know, I know lots of our colleagues in and around the global commodities sector are currently in the uae, in Qatar, in Bahrain, in Saudi, and obviously we wish them safety. And now our sincerest hopes that this is over very quickly. You know, it's obviously terrifying and obviously terrible. So we are all obviously hoping this is over. Very, very quickly as global free traders. Somehow I think that it might take longer than expected.

A (43:05)

Well, I hope you're wrong, Paul, but I very much hope that all of your colleagues, both at your firm and in the sector, are hunkering down and remain safe and sound.

B (43:19)

Yeah, okay. Well, Nick, I hope that you and I just talk socially and

A (43:25)

there isn't

B (43:26)

another emergency podness this side of. At least in Q1. Right. So. But as always, people can go find your work at Green Mantle's website. I can follow you on LinkedIn and great insight, both obviously proprietary to Green Mantle, as well as the weaving in the economic and the historical perspective as well, to give a bit of a, you know, smart and insight found. Smart insight and insight found nowhere else, as per expecting that the US Will step up and backstop insurance markets. So, well done on that one.

A (43:58)

Yeah, you're gonna have to timestamp that one down to the minute.

B (44:00)

Yeah, yeah, exactly. Okay, well, it's March 3rd, 1:51pm as we record this, so Euston time. So. Anyway, thanks for coming back on, Nick.

A (44:11)

Always a pleasure, Paul. Keep up.

B (44:19)

Thank you for listening. To find out more about HC Group, our global offices and our expertise in search within the commodities sector, please visit www.hcgroup.global.