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Welcome to The Geopolity’s What We’re Watching (3W), our daily look at the interconnected worlds of Geopolitics, Economics and Energy. Curated from the world’s leading sources of information, our analysis and commentary is designed to help you make sense of the events driving the major developments in the world.
Over the past few days, since the signing of the US – Iran MOU, oil prices steadily declined, to eventually reach pre War levels, around $70 per barrel. On Monday, oil’s downward trend continued, as Saudi Arabia announced that for the first time since 2020, it would be selling its oil at a discount versus the regional benchmark, writes Bloomberg.
In a recent opinion piece, Javier Blas of Bloomberg explained the “market force” behind this development. “Now the US-Israeli war on Iran is over,” he writes, all eyes will be on China, as its behaviour will determine if oil prices nudge back up (if China decides to refill inventories drawn down during the war), or stay at this level (if China decides to wait for a better restocking opportunity). But, Blas adds, if oil remains at current levels, inflation should be contained, and the world’s central banks could lower interest rates to support growth. In this case, all would be well and the US – Israel Alliance War on Iran would end without any meaningful impact on global economic wellbeing.
At 3W, since the signing of the MOU between the US and Iran we have presented an alternative outlook for both the War on Iran and the global economy. We previously explained our view that the US – Israel Alliance is not negotiating with Iran in sincerity, but only to buy time. And we then proceeded to explain why we believe the best possible short term outlook is one where the conflict enters a “Slow Burning” phase. After which we explained why we believe that in “Slow Burning” phase, shipping through the Strait of Hormuz will remains at below normal levels, while elevated risks will maintain significantly higher shipping costs. Because of this, we said the oil market is under-pricing the risks to oil supply and the damage to Gulf energy infrastructure.
As to which of these analyses is more likely correct, the “war is over” analysis or the “slow burning” analysis, traffic through the Strait of Hormuz has picked up since the signing of the MOU, writes The New York Times. On Monday 36 ships passed through the strait in both directions. But, that remains significantly below the 100 ships daily that was the norm before the Alliance launched its War on Iran.
In addition, NYT notes that since the MOU a number of “tit-for-tat” strikes have taken place between the US and Iran over shipping through the Strait of Hormuz, for example on June 29th, as we at 3W noted then.
Yesterday, Iran again attacked vessels trying to pass through the Strait of Hormuz without coordinating with it, this time a Qatari LNG tanker and a Saudi crude oil tanker, and the US and Iran entered the latest round of tit for tats strikes as a result. The US first attacked Iran on Tuesday evening, writes The New York Times, after which on Wednesday Iran attacked Bahrain and Kuwait (which host the US military forces attacking Iran), writes The Associated Press.
Iran again attacked vessels trying to pass through the Strait of Hormuz without coordinating with it, this time a Qatari LNG tanker and a Saudi crude oil tanker
In response to the development, Brent crude oil futures jumped 2.6% to $76.09 a barrel early Wednesday, while US WTI also gained 2.6% to $72.25 a barrel, writes The Associated Press.
In our 3W view, this makes clear that “Slow Burning” MUST be the basis for speculative analysis as to how the US – Israel Alliance War on Iran will affect the global economy. The idea that this war is over and the world is back to normal lacks any factual support. For reference, at 3W we previously performed this speculative analysis, and concluded that stagflation and popular protests around the world should be expected.
What makes this global economic outcome more likely is that on Tuesday the US suspended the sanctions waver for Iranian oil, writes Bloomberg. The US waiver was part of the MOU. It issued in late June and gave Iran 60 days to sell its oil without being subject to American sanctions. Together with the lifting of the US naval blockade on Iran, it made Iranian crude oil available to the global market again. The US said it took its decision in retaliation for Iran’s attacks on tankers in the Strait of Hormuz. At 3W we believe it is important to note that this development is the second time the US officially withdraws from a key commitment it made under the MOU. The first was when it withdrew from its commitment to pressure Israel to halt its War on Lebanon. The second is the withdrawal from the commitment to allow Iranian oil sales. Our 3W conclusion from this is that the MOU is slowly but steadily dying.
At 3W we would argue that this (foreseeable) development should be seen as part of the wider trend in geopolitics, which is toward conflict rather than collaboration.
During the most recent NATO meeting, in Ankara, Turkey, US president Trump was as divisive as ever. The New York Times writes he criticized Denmark, and reminded NATO leaders that he still had designs on Greenland; and complained that Britain, France and Italy did not do enough to support the US in its war against Iran. The Financial Times adds that Trump also said he could remove all American troops from Europe, if, according to The Associated Press, Europe does not show more “loyalty” to the US. There are approximately 80,000 US troops throughout Europe, which Nato allies see as a critical plank of the continent’s defences, a deterrence against attacks and an embodiment of Washington’s commitment to come to their aid in the event of an attack.
The result is that the UK, France and Germany have launched a $50 billion NATO initiative to spur the development of long-range weapons without US involvement, writes Bloomberg. The three nations, alongside other European allies, will work over the next decade to develop strike systems to hit targets more than 2,000 kilometers (1,240 miles) away with pinpoint accuracy — a capability missing from the continent’s arsenals. The program will coordinate expertise, technological advances and industry across the countries involved, according to the UK government.
Of course, on the geopolitical stage, one party’s “re-armament” equals “arming” to the other parties. No surprise, then, that in the background to the NATO conversations about additional weapons manufacturing, China performed a test of a submarine-launched ballistic missile, to communicates its determination to build a full suite of nuclear weapons, including sea-based missiles, writes The New York Times. The test indicates China has developed a holistic nuclear triade, capable of launching nuclear weapons from land, air and sea.
India, meanwhile, signed an agreement with Indonesia to collaborate on the sale and further enhancement of supersonic cruise and air-to-air missiles, writes Nikkei Asia. The signing of the memorandums of understanding came after Indian Prime Minister Narendra Modi and Indonesian President Prabowo Subianto held talks in Jakarta on the second day of the Indian leader’s state visit. The supersonic weapons are the 8.4-meter-long BrahMos missiles that India designed in a joint venture with Russia and can be launched from land, sea and air. They have a range of approximately 290 kilometers. Beyond-visual-range air-to-air Astra missiles are also expected to be supplied.
In the 3W view, what this all means is that the medium to longer term outlook for the world is far worse than the stagflation and public unrest we foresee for the next 6 to 18 months. The world is preparing for World War III – we have little doubt about it.