I A combination of new attacks on tankers in both the Red Sea and the Strait of Hormuz in recent days have, as discussed in earlier notes, gradually pushed the global oil price upwards towards $100/barrel again (Brent September Contract at the time of writing back at $100). This development will reignite inflationary concerns among central banks across many economies and politically quickly strain Donald Trump’s brief domestic freedom to pursue a more militarized strategy against Iran.
Another fundamental decision looms for the U.S. president – return to a now likely broader war in the Middle East, or allow regional mediators to once again put ideas on the table for an inevitably shaky and temporary ceasefire on the table to – once again – reduce geopolitical risk premia surrounding the transit of fossil energy out of the Persian Gulf.
Guided by Trump’s earlier actions during this war and the still elevated political stakes he faces in the U.S. Midterms, I continue to have it as my base case (2/3 probability) that Trump chooses the latter “diplomatic route”.
The “coercive factor” remains the oil price, which likely now closer to the Midterms does not need to rise all the way back to the $120/barrel range seen earlier for force Trump’s hand. Another element of his “exit ramp” this time is an increasingly likely U.S. air strike on Iran’s Pickaxe Mountain nuclear facility, combined plausibly with a broader temporary spike in U.S. airstrike intensity back towards levels seen earlier in the war.
The conflict in Lebanon appears contained at the moment, and the U.S. and Saudi Arabia has just struck a nuclear deal that unlike an earlier one with UAE in force since 2009 will potentially permit Saudi enrichment (the deal’s relation to Saudi-Israeli normalization is further unclear), in principle setting the precedent for such in the Persian Gulf region, and hence making it (even) more likely that any future nuclear deal with Iran will provide it the same right.
The Strait of Hormuz remains the hot point of conflict, for which nothing has however really changed in recent weeks. Now 12 straight days of U.S. bombing to “degrade Iran’s military capabilities” have predictably had no real effect on Tehran’s ability to continue to strike transiting tankers in the Strait with long-range drones or missiles, and the increasing economic pressure on Iran can only hope to work in the medium-term in changing Tehran’s policies. As a consequence, Hormuz transits have now dropped an estimated 75 percent, again putting global oil prices on a steady upward path.
Simultaneously, the Red Sea theater around the Bab Al-Mandeep has heated up with the Houthis striking at least one verified Saudi flagged tanker (Houthis claim they struck two, but they do not have a history of factual statements) in the Southern Red Sea, close to the Yemeni-Saudi maritime border.
According to the Houthis, they are now imposing “A Siege For A Siege” on Saudi Arabia, relating the current attack to the ongoing Saudi blockade of ports and airports under Houthi control. This development has several implications.
First, it is clear that its timing adds to the already upward pressure on global oil prices, and as such aids Iran in the current standoff with Donald Trump. Yet, this despite the probable increase in shipping insurance premia in the Red Sea, does not on the face of it amount to a “closure of the Bab Al-Mandeep Strait, as previously threatened by Iran.
Rather it appears to be an opportunistic move by the Houthis to shift the status quo in their decade long conflict with Saudi Arabia. Other ships, unrelated to Saudi Arabia should in principle be free to continue to transit the Red Sea, and reportedly this even includes Chinese flagged oil tankers which sailed through the Bab today. As such, while the Houthis probably only need to shoot once to have the desired effect on oil prices (they do after all have a history of firing into the Red Sea if they choose to, even under U.S. bombardment), their recent action appears somewhat calibrated and discriminates based on the flag/destination of the tankers involved.
This should contain the spillover of the tanker hit to other naval sectors, like container shipping, and does not imply a closure of the Saudi bypass outlet at Yanbu, with the Northern exit through Suez still open and tankers still able to sail to China. Only a successful Houthi strike directly on Yanbu itself would have the full effect on global oil markets.
Donald Trump is essentially now back at the two options for the war he faced in early June, when the MoU with Iran was agreed. Rising oil prices extract an accumulating political and economic toll on his electoral prospects in the United States, forcing him into either returning to negotiations or escalating.
Choosing the latter option would – in light of the most recent U.S. polling on this issue, including by Fox News and including for MAGA voters – de facto mean that Donald Trump would be willing to willingly lose the Midterm elections to pursue an overwhelmingly likely futile military escalation against Iran. In light of the evident downside for the President and his party of losing control of both houses of Congress for 2026-2028, this seems an unlikely political choice.
Meanwhile, a return to a negotiated path, while unpalatable in normal times given the content of any possible deal, will with oil back at $100/barrel begin to look as the relatively less unattractive option. Having withdrawn Iran’s previous sanctions waivers, Trump now has the added availability of giving them back to Iran as part of any new arrangement.
The basics of the future of the Strait of Hormuz likely remains roughly the same – permanent tolls remain highly unlikely, but Iran will not abandon physical control of the Strait (e.g. reopen it) without first securing a broader deal that provides it with a degree of political insurance against future U.S. attacks, a sizeable amount of financial incentives up front in the form of access to previously frozen Iranian assets around the world and more lasting and politically secure U.S. sanctions relief, and some form of regionalized “fig leaf institutional” control of the Strait of Hormuz, together with Oman and other littoral states in the GCC.
Producing a diplomatic proposal satisfying these demands, as well as providing Donald Trump with a politically salient “exit ramp” from the conflict remains the main challenge for regional mediators. Their work efforts will be tested once again in the coming days.
Two new developments also impact this outlook. The decision by Lloyd’s to effective ban – if you want insurance – the payment of any toll to Iran effectively means that only a negotiated solution with Iran can hope to restore transits in the Strait of Hormuz. This is the direct outcome of the U.S. inability to militarily deal with the Iranian drone threat. The global insurance industry is hereby weighing in to force a negotiated solutions.
Lastly, the risk of a catastrophic oil spill from a Russian shadow tanker in Omani waters will likely make Muscat somewhat more open to a “regional institution” to assert administrative control over the Strait. This also pushes for a deal with Iran, and could see a major crackdown on the under/uninsured Russian shadow fleet coming from many countries worried about their own territorial waters.
Meanwhile, once again rising oil prices will see inflationary pressures reemerge across the global economy. The ECB today, as discussed earlier, chose not to raise euro area interest rates again. However, the Governing Council statement by emphasizing how it is “closely monitoring the intensity and duration of the [energy] shock” made another hike in September the now very strong base case outlook for the euro area.
With oil prices now back above the assumed $96.9/barrel assumed in the ECB’s June macroeconomic forecast, even a renewed decline from current levels from a likely resumption of diplomacy is unlikely to dissuade a majority of the ECB Governing Council from hiking again in September.
Increased concerns about energy-induced price pressures are likely to play an elevated role in monetary policy decisions across the global economy in economy in Q3.
II In Ukraine, despite the formal democratic election process being suspended due to the war, popular pressure from street protests facilitated the appointment of Mykhailo Drapatyi as new commander of Ukraine’s Armed Forces, succeeding Oleksandr Syrskyi.
This completes the generational change at the top of Ukraine’s military with the 43y old Drapatyi taking over from the 60y old Syrskyi, and sees an officer whose entire senior military career has been shaped by the war with Russia since 2014 take coverall command of Ukranian forces. This is good news for Ukraine, as its army has in recent months been “leveling the playing field” against its larger foe, and general Drapatyi is certain to continue the development of Ukraine’s most successful military innovations in drone warfare and other tactics.
General Drapatyi is further known for his strong focus on minimizing Ukrainian personnel losses, meaning a further acceleration of Ukraine’s drones-for-soldiers-on-the-frontline strategy is probable. This in turn should help Ukraine complete the necessary reform of its mobilization processes, and possibly somewhat alleviate its chronic manpower shortages in this war.
Overall therefore, as the prospects for further Russian escalation in the fall via renewed mobilizations of Russian manpower rise, Ukraine will have a new commander fully committed to both drone-based warfare and a continuation of Ukraine’s deep strike strategy against Russian economic targets.
This will not win or even end the war in the near-term – the conflict now looks essentially certain to continue into 2027 with likely increased intensity over the winter – but it underlines that Ukraine continues to look like the warring party most adept and able to change with technological developments, while retaining a link between the war effort at the front and public opinion.
As the economic and political effects of also deep strike campaigns are likely to accumulate during 2026 also in Russia – and especially during the winter season – having legitimate, publicly respected and capable military leadership in place looks likely to become an increasingly valuable asset for Ukraine.
In sum, while the war is not about to end, this week’s personnel changes at the top of Ukraine’s armed forces further reduced Russia’s odds of prevailing.
Jacob
