The White House has slammed the brakes on diplomatic efforts to revive the Iran nuclear deal, with President Donald Trump reportedly concerned that the negotiations were heading towards a 'hasty surrender' to Tehran. Sources close to the administration suggest that the President ordered a pause after intelligence briefings indicated Iran was using the talks to buy time while accelerating its nuclear programme. The move has sent a shudder through global oil markets, with Brent crude spiking 3% on the news as traders priced in a prolonged period of uncertainty in the Gulf.
Downing Street, meanwhile, is keeping a close watch on the reopening of the Strait of Hormuz, a vital waterway through which 20% of the world's oil passes. The strait was closed last week after an incident involving an Iranian speedboat and a British-flagged tanker. Although the Admiralty has confirmed that naval escorts have resumed, the 'all clear' has not yet been sounded. 'We are monitoring the situation hour by hour,' a Number 10 spokesperson said. 'The free flow of traffic through Hormuz is a matter of national security for the United Kingdom.'
The market reaction has been characteristically jittery. Gilt yields edged higher as investors sought safety in long-dated Treasuries, while sterling fell against the dollar - a classic flight to safety play. The FTSE 100 shed 0.8% in afternoon trading, with BP and Shell both down over 2%. The cost of insuring tankers against war risk has doubled since last week. This is the kind of volatility that keeps CDOs awake at night.
Let us be clear about what is at stake here. Iran is a master of strategic patience. They have used previous rounds of talks to advance their centrifuge capacity while Western diplomats argue over commas. Trump's instinct is correct: the ayatollahs will not be talked out of their nuclear ambitions. They must be squeezed until the regime cracks. That means secondary sanctions on any entity trading with Iran, including our European allies who keep propping up the failing JCPOA.
Yet the Treasury must also reckon with the fiscal consequences. A protracted crisis in the Gulf means higher oil prices, which feed into inflation. The Bank of England will have to raise rates faster, choking off whatever recovery we have left. The Chancellor should be preparing a contingency fund to cushion the blow for households, but given the state of the public finances, he might as well be budgeting for unicorns.
In sum, the markets are pricing in a 'no deal' scenario on Iran. The prudent investor should be overweight in gold, short on oil consumers, and long on defence stocks. Until Hormuz is unequivocally safe, every ton of oil that passes through carries a risk premium. And with Trump playing hardball, I suspect this crisis is far from over.
