The Wrath Of Kharg

By Ben Picton, Senior Market Startegist at Rabobank

Brent crude is bid again this morning as markets digest the dump of news over the weekend relating to the Iran war. On the bullish side for crude was the US decision to bomb Iranian military assets on Kharg Island – the Persian Gulf port where up to 90% of Iranian oil exports are typically loaded onto tankers. Announcing the strikes via Truth Social, President Trump was at pains to be clear that oil infrastructure was not targeted, but the implicit threat that it could be is an unsubtle one. Trump later said that the US may conduct further strikes on the island “just for fun”. 

News also emerged over the weekend that the USS Tripoli has been redeployed from the Western Pacific to the Persian Gulf. The Tripoli is a light aircraft carrier with a complement of 2,500 marines and an F35B stealth fighter air wing. Speculation is rife that the marines could be used to secure oil infrastructure on Kharg Island, or perhaps to help clear the mountains north of the Strait of Hormuz of Iranian belligerents (the latter seems less likely). Either would be a case of ‘boots on the ground’ and interpreted as a major escalation. Iranian officials have said over the weekend that they would respond in kind to any attacks on their oil infrastructure. Indeed, there were further limited attacks on oil assets of US-aligned Gulf states over the weekend, which may explain the bid tone in Brent this morning and a lift in the forward curve since this time last week.

A bizarre intervention in the war came from Hamas, who called for Iran to cease attacks on regional neighbors. Hamas is well-known as an Iranian proxy, so there is some speculation circulating that this may be an attempt from the Iranian side to begin to engineer an off-ramp. Coupled with news last week that Iran had struck agreements with India and Bangladesh to allow crude cargoes to pass, and comments from the Iranian Foreign Minister over the weekend that the Strait was not closed to anyone other than the US, Israel and their allies, there appears to be some cautious optimism in markets this morning that glimmers of hope for an end to hostilities are emerging. AUD and NZD are both trading higher, spot gold is down to almost $5,000/oz and bitcoin is catching a bid.

However, ‘glimmers’ is the operative word. While Hamas was calling for Iran to end strikes on neighboring states the Houthis (another Iranian proxy) were giving signs that they are ready to escalate against shipping being diverted into the Red Sea to load crude cargoes at the Saudi port of Yanbu. Disruptions to Red Sea shipping – which the Houthis have proven adept at over the years – would close off the release valve of the Saudi East-West pipeline that is capable of redirecting 5-7mn bbl/day to offset the ~18-20mn bbl/day supply interruption.

There is also the fact that South Korea and Japan – both major destinations for Gulf energy cargoes – would likely be considered US allies and therefore not allowed to receive crude shipments under the terms of the Iranian toll road. Trump himself has rebuffed suggestions of a ceasefire over the weekend, saying that he is not yet ready to end the war because the terms offered by Iran are not good enough. Iranian officials deny that any terms have been offered at, beyond the US’s withdrawal from the Middle East and payment of reparations. No wonder Trump isn’t keen. Prediction markets are this morning implying odds of a ceasefire before month end of just 14%, down from 21% on Friday.

There are glimmers of hope in other areas. The Wall Street Journal is this morning reporting that the United States is set to announce the formation of an international coalition to provide naval escorts to tankers transiting Hormuz. Some commentators on X have already observed that this would run counter to Donald Trump’s recent shot at UK PM Starmer, where he said that the US doesn’t need allies who only turn up after the war is won (the British might have their own thoughts on allies who arrive late to wars). Nevertheless, there does seem to be a plan developing, though both South Korea and Japan have signalled caution about deploying warships to the Gulf as China resumes military exercises around Taiwan after a 10-day hiatus.

Speaking of China, US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer are currently meeting with Chinese officials, including Vice Premier He Lifeng, in Paris to discuss trade. The talks come ahead of a much anticipated Trump-Xi summit in Beijing on March 31st and are expected to lay the groundwork for that meeting. Early reports suggest that the American side asked China to buy more Boeing aircraft, and US coal and gas. With Qatari liquified natural gas exports currently out of the market, and the Chinese economy approximately 50% dependent on imports for its domestic needs, it should be an easy sell. Japan’s Industry Minister has also recently reached out to Australia to urge a ramping up of LNG production, though this will take time and is sure to face opposition from environmentalists in Australia.

The timing of the Trump-Xi meeting is interesting. Trump will be headed to Beijing with Chinese influence having recently been ejected by America power in Venezuela, Cuba and the Panama Canal. The strikes on Kharg Island – which is the main port of origin for a large slice of China’s oil imports – also raises the prospect of Chinese influence in central Asia being severely curtailed. The US is a mostly self-sufficient net energy exporter who suddenly occupies several key maritime chokepoints for Chinese energy imports. The message to Beijing couldn’t be more clear: if you attempt to leverage rare earth supply chains against US interests, the US will leverage energy supply chains against Chinese interests. Regular readers would be aware that we have argued the logic of this for the last 18 months.

So, again we see that economic statecraft is employed to create supply chain pressure to get what you want. To appreciate this disruptive power fully, it must be recognised that the Iran crisis goes far beyond energy and the supply shock will reverberate through everything from petrochemicals, to agriculture to pharmaceuticals and beyond. China’s industrial dominance therefore becomes an Achilles heel in a global economic shock. For a comprehensive accounting of the likely impacts, see this excellent piece produced by the RaboResearch Food and Agribusiness team.

Trump wants Hormuz open again. Xi wants guarantees that Gulf oil will continue to flow to Chinese refineries, Chinese industrial producers will have markets to sell to, and Chinese consumers will have food to import. Trump thinks he has the upper hand in this negotiation and so on Sunday night he told media that he could seek to delay the Beijing summit and that he expected China to help open the Strait of Hormuz. He is playing hard to get, and trying to put all of the pressure on Xi to force a resolution. To paraphrase Nixon’s Treasury Secretary John Connally: “it’s our war, but it’s your problem.”

So, could the upcoming summit be the moment where we see Beijing issue the directive to its allies in Tehran to end the blockade? For Xi it may be a choice between that, or suffering the wrath of Kharg on the Chinese industrial economy.