The Nightmare Scenario Has Arrived

Oil is up over $100 p/b, the stock market is plunging and Iran’s new Supreme Leader bears a striking resemblance to the last guy. The Islamic Republic announced that the son of it assassinated Supreme Leader, Mojtaba Khameni, will take the throne: a big, unswept middle finger signaling that Iran isn’t backing down, its gone apocalyptic. It’s hard to say what exactly this will cast you, as we’re in new territory here.

Iran has effectively shut down traffic in the Strait of Hormuz, without having actually to hold it, with amped-up Houthi style attacks from the interior. Shipping insurers are treating it as functionally impassible. The knock on effect is that Gulf oil producers are shutting down production as storage facilities max out. Several Gulf States has declared a force majeure – a clause excusing liability when delivery simply can’t be made. The nightmare scenario has arrived.

The 4717 Shot: Doing a quick cocktail napkin calculation, we can assume that the older, hardline faction of the IRGC is somewhat in charge of the show. Placing old guy’s son is telling - the IRGC needed both regime consistency and to strike a defiant tone. This war doesn’t look likely to be over in  the four weeks investors have penciled in.

What that means, in short, is the problem is more logistics than geography, going forward:

1. Energy volatility is now structural rather than cyclical. the Hormuz maneuver was always Iran’s ace in the hole. Like the Disco-era Arab “Oil Weapon” and it was always going to work very well, but only once.

2. The appointment of Mojtaba Khameni was more a gesture than solution. The force behind the throne will now be scrambling to establish control. If that pattern holds, the chaotic “mosaic defense” strategy that the IRGC has deployed in the absence of a government might evolve into a more coordinated, centrally directed campaign.

3. Escalation control will be difficult: Wars are easier to start that to wrap up. This will play to Iran’s short term advantage as it engages in “horizontal escalation” - brings everyone and their brother into the war.

Even if Iran is on the ropes, it has leverage to play, and it feeling apocalyptic. Wars are easier to start than finish, and it difficult to hedge where you will be when the fighting stops of the system collapses. Here, Iran is not in danger of becoming another Iraq, but another Libya - a rouge petro-state that doesn’t so much collapse but continues to generate chronic stability.