Beyond the fog of war, big changes are taking shape

Over the past six weeks of the Iranian conflict, we’ve witnessed significant upheaval. Whether it’s oil spiking, the damage inside Iran and its neighbours in the Gulf, or fears that this conflict could escalate into an all-out war, it’s shaken the world.

The world watches intently on what’s next – a ceasefire or escalation, when the Strait of Hormuz will resume normal transit, how countries will manage their energy sources, etc.

But the fog of war is blurring our vision of what is ahead, as both sides in the conflict have tried to negotiate but failed to reach an agreement.

Even the messaging from the leaders involved has ranged from receptiveness to near-apocalyptic belligerence. The weekend just passed saw a 21 hour-long negotiation in Islamabad, Pakistan, conclude without a satisfactory resolution.

So we’re back at it again, until the next round of negotiations.

Guessing the outcome of this is a mug’s game. You might as well toss a coin or, if you’re in the mood to write a suspense thriller, write your own version of what will unfold. The latter, if planned out and written well, might even make you the next Tom Clancy!

I’m not about to set my sights on changing career to be an author of wartime thriller novels. However, I’ll share my views on what is unfolding, beyond the uncertainty of the developments in this conflict.

Restructuring global trade
and the energy markets

The world is increasingly seeing that the conflict between the US, Israel and Iran is more than just a conventional campaign to subdue a nation. What is most impactful on the global economy is the contest to control the Strait of Hormuz, among other things.

This passage of water is strategically important to the oil trade and seaborne transportation between Asia, the European Union, the Middle East and Australia.

We’ve seen oil spike by more than 50% in early March, shortly after the conflict erupted. This was because the conflict virtually halted shipping in and out of the Strait of Hormuz.

Most accept that the Strait of Hormuz is closed, which is imprecise. Over the past month, a number of ships from several countries have sailed through the Strait.

But it’s worth noting that shipping companies have been reluctant to set sail, fearing they could endanger their crews and cargo. At the same time, marine insurers refused to cover ships going through the Strait.

Perhaps this explains the prevailing perception that the Strait is closed.

As the latest negotiations ended without a resolution, President Trump has announced that it may consider using the US Navy to blockade the Strait. This move should put to rest the expectations by many analysts and observers that the Trump administration was going to conduct a full-scale ground invasion of Iran.

What is now evident is that controlling the Strait of Hormuz is of paramount importance, surpassing the importance of annexing Iran.

What is uncertain is when we’ll see who emerges as the side that calls the shots on the Strait of Hormuz. However, I suspect the US will have a significant role, contrary to the media reporting continually about the setbacks faced by the US, even hinting that the US faces a humiliating defeat.

I base this on the declining intensity of bombardment of neighbouring Gulf Nation facilities by Iran prior to the ceasefire. The Iranian military and navy have likely weakened. Moreover, the US Navy is beginning to remove the mines laid by the Iranian forces in the Strait of Hormuz to deter safe passage, suggesting the US has the tactical advantage.

While commercial activity in the Strait of Hormuz is anemic, a major shift in the oil market has taken place. Many empty oil tankers that normally sailed to and from the Persian Gulf via the Strait of Hormuz are now sailing to the US to buy oil.

What could happen beyond the conflict is a change of control in the Strait of Hormuz. Moreover, if there is regime change in Iran with the toppling of the Iranian Revolutionary Guard Corps from power, it could result in removing sanctions on Iranian oil. This would increase the oil supply in the open market, further changing the dynamics of the oil market.

Revealing and realigning alliances

Another major change that will take place is the alignment of the US and NATO.

As the conflict heated up, the Trump administration called upon the US’s traditional allies – NATO, and Australia – to join. The reception was lukewarm at best, with the UK Prime Minister Keir Starmer, French President Emmanuel Macron, and German Chancellor Friedrich Merz, all avoiding committing military aid or allowing the use of their bases to launch strikes.

Regardless of one’s view of the conflict, it’s clear that the traditional allies have proven unreliable at best, and obstructive at worst.

The irony is that these countries stand to gain from having the Strait of Hormuz reopen. Moreover, the countries in the European Union have relied largely upon Russia, a hostile nation, for their fossil fuel supplies. Closing the Strait of Hormuz forced them to increase their reliance on Russia.

Such behaviour may currently appeal to those who dislike the Trump administration because of the symbolic gesture. However, it comes at the cost of their domestic economies. Being consumer economies and net energy importers, they are in a weak bargaining position, especially when their major energy source are fossil fuels.

President Trump has responded to this by stating that these countries will face negative consequences for their lack of cooperation. And should the conflict with Iran end in its favour (which I believe is increasingly likely, based on the administration’s goals), these countries will feel the heat.

What’s almost certain is that the US will reduce its involvement in NATO. It may withdraw from NATO altogether. Should that play out, NATO will effectively fold.

Regardless of the outcome of the conflict, expect major restructuring of foreign relations between the US, the UK, and the European Union. This will flow through to trade and diplomatic relations with the broader world.

What won’t change amidst
changing dynamics

The world has become aware of how vulnerable our global supply chains are at the start of the decade, amid global lockdowns and reliance on China as the world’s manufacturing hub. This conflict in Iran has once again highlighted this issue. This time its emphasis is on energy supply and production.

The conflict will change the dynamics in geopolitics and the energy markets. However, what won’t change is the growing appetite for commodities, whether energy, minerals, or agricultural. The questions that each country will ask are how much and from where they will source these.

Australia is blessed with vast natural resources, much of which await discovery and development. Our mistake has been to extract and export them in vast quantities, while failing to retain enough as reserves for our own use. This is especially the case with fossil fuels and uranium.

As the world embraces the next phase of development, it’ll demand more resources.

We have the box-office seats on mining companies in Australia that could deliver you significant returns.

Investing in the energy and resources sectors isn’t easy. Many companies present an attractive case but their team will merely mine your wallet, rather than deliver you wealth.

If you want guidance on what to buy and which to avoid, I suggest you watch this presentation.

Meanwhile, expect more drama and shifting narratives ahead with the Iranian situation. Don’t let that throw you off.

That’s it from me for this week. Take care!