3 Scenarios For The Middle East Crisis
Energy flows may not resume when the war ends, and markets are mispricing the timeline. Understand the 3 scenarios facing investors and how to position.
Welcome to this special edition of Crack The Market dedicated to the rapidly spiralling situation in the Middle East.
This piece will help you understand what is really happening under the surface, the 3 scenarios that could unfold and how to play them.
Earlier this week, on March 3rd, I published a comprehensive deep dive into the initial geopolitical shock: Middle East War: What Now?
If you haven’t read it yet, I highly recommend starting there, as it serves as the foundational macro thesis for this rapidly deteriorating crisis we have just entered.
Twice a week, I release deep dives into stocks and sectors that fit into the 6 themes that I see winning in the coming years and decades: AI & Technology, Electrification & Energy, Reshoring & Sovereignty, Healthcare & Longevity, China & Asia, Resilience & Quality.
Take advantage of this once in a generation opportunity to build long term wealth by investing in great stocks that will deliver returns for your portfolio for years to come.
Introduction: The Buffer is Gone and The Rules Have Changed
The situation on the ground is spiralling significantly faster than originally thoughts and than algorithmic trading models and investors can process.
To understand the stakes, we have to look at the scale of what is currently trapped. The Strait of Hormuz is a 21-mile-wide maritime chokepoint, but its navigable deep-water shipping lanes are merely two miles wide in each direction. Typically, roughly 20 million barrels of oil, equivalent to 32% of all seaborne crude globally, and roughly 20% of the world’s liquefied natural gas (LNG) funnel through this needle’s eye every single day. Today, that flow has functionally collapsed from 16 million barrels a day to near zero.
The unwritten rules of measured retaliation that historically protected critical civilian energy infrastructure from direct kinetic warfare have been completely erased. Following the initial salvos of “Operation Epic Fury”, both sides are now targeting energy infrastructure in the region, which combined with the invisible blockade of The Strait of Hormuz (that I discuss later), are pushing us closer to a global energy crisis every day.
US and Israeli forces are now directly targeted Iran’s domestic energy supply lines, striking the Shahran oil depot and facilities adjacent to Tehran’s main refinery.
Iranian retaliation was unprecedented in scale: a massive barrage of 117 drones and 17 ballistic missiles directed at the UAE, direct hits on the Haifa oil refinery in Israel, and successful strikes against aviation fuel storage tanks operated by Kafco at the Kuwait International Airport.
In my previous note, I warned you about a ticking clock: Gulf producers only had roughly 25 days of onshore storage capacity to act as a buffer for stranded output before they would have to start shutting down production. Because of the sheer scale of the infrastructure damage and the total logistics standstill, that 25-day clock has already violently accelerated to zero.
Kuwait has officially declared force majeure and initiated forced shut-ins of its 2.6 million barrels per day of production.
The UAE is also actively reducing its 3.4 million bpd output to prevent catastrophic storage overflows.
Let me be absolutely clear: we are no longer trading the risk of a supply shock. The physical destruction and forced shut-in of global energy supply is actively happening right now.
Yet, the market is fundamentally mispricing this crisis: They are treating it as a transient event, tracking a military timeline and assuming a 4-8 week kinetic campaign that ends with oil flowing normally the moment a ceasefire is signed. But the reality of global trade is governed by an insurance timeline. That mismatch, the gap between when the kinetic military action stops and when actuarial risk models actually allow global trade to resume, is the ultimate alpha opportunity.
In this piece, I will strip away the emotional headlines to break down exactly what is happening behind the scenes, map out the cascading structural fractures threatening the global economy, and give you the exact 3-scenario barbell playbook, balancing hard asset fortresses with oversold software compounders, to position your portfolio for the months ahead.
The End of the Storage Buffer
The unwritten rules of engagement that historically protected civilian and export energy infrastructure from direct kinetic warfare have been completely erased. We are no longer dealing with a localized military exchange. Infrastructure is no longer collateral damage, it is the primary target.
Over the past few days, US, Israeli and Iran have started hitting energy infrastructure in the region. This kinetic reality has created an absolute logistical paralysis at the geographic epicenter of the global economy: the Strait of Hormuz.
While the Strait is 21 miles wide at its narrowest point, the actual navigable deep-water shipping lanes, the traffic separation scheme that allows massive supertankers to pass safely, are only two miles wide in each direction. Roughly 20 million barrels of oil (32% of all seaborne crude globally) and 20% of the world’s LNG funnel through this needle’s eye every single day. Today, satellite tracking data reveals a multi billion dollar parking lot on the water. Over 200 Very Large Crude Carriers (VLCCs) are currently idling in anchorage zones or trapped inside the Persian Gulf. Export flows have plummeted from a standard run rate of 16 million barrels a day down to functionally zero.
A logical question to ask is: Can’t producers just bypass the water and pipe the oil overland?
There is some built-in redundancy via the East-West pipeline in Saudi Arabia and the ADCOP pipeline in the UAE, but their combined operational capacity is only about 3.3 to 5 million barrels per day. That structural bottleneck leaves roughly 15 million barrels of oil physically stranded every single day. To put that into perspective, 15 million barrels is roughly equivalent to the entire daily energy consumption of the European Union, now sitting completely trapped in a maritime parking lot.
In my previous note, I warned you about a ticking clock: Gulf producers only had roughly 22 to 25 days of onshore storage capacity to act as a buffer for stranded output before they would have to start shutting down production. Because of the sheer scale of the infrastructure damage and the total logistics standstill, that 25-day clock has already violently accelerated to zero.
Gulf storage capacity has strained to the breaking point. Kuwait Petroleum Corporation (KPC) has been pushed over the edge, officially declaring force majeure and initiating forced shut-ins of its 2.6 million barrels per day of production, explicitly citing the total absence of available shipping and rapidly filling onshore tanks. The UAE is also actively reducing its 3.4 million bpd output to prevent catastrophic storage overflows.
A forced shut-in is not as simple as turning off a kitchen sink. Oil reservoirs operate under immense natural pressure; if you suddenly choke off a well, you risk permanently damaging the geological formation itself, which can severely reduce the ultimate recoverable yield of that well. Producers will do everything in their power to avoid this. The fact that Kuwait and the UAE are executing them right now tells you exactly how dire the physical reality is.
Let me be absolutely clear, invesors are still trading the risk of a supply shock. They are wrong. We are no longer trading a probability. The physical destruction and forced shut-in of global energy supply is actively happening right now.
The Invisible Siege (The Actuarial Blockade)
Right now, investors are glued to satellite imagery of naval destroyers and drone strikes, trying to forecast a military timeline. They are looking in the exact wrong place. The Strait of Hormuz is not functionally closed because of a physical military blockade or a net of naval mines. It is closed because of paperwork in London.
Between March 1st and March 2nd, seven of the twelve Protection and Indemnity (P&I) mutual insurance clubs, which collectively insure roughly 90% of the world’s ocean-going commercial maritime tonnage, issued 72-hour cancellation notices for war-risk coverage across the entire Persian Gulf, the Gulf of Oman, and all Iranian territorial waters.
Without this mutual third-party liability cover, a $100m, Very Large Crude Carrier (VLCC) transforms instantly into a commercially unviable, toxic asset. Destination ports will legally refuse them entry (fearing uncovered environmental spills), cargo owners refuse to load them, and most importantly, the massive global banks that finance these billion dollar shipments immediately pull their letters of credit. The vessel becomes a paralyzed object adrift in a system that runs entirely on institutional trust.
A logical question to ask is: Why don’t the insurers just drastically raise their premiums, like they did during the Tanker Wars of the 1980s? This is the structural blind spot the market is completely missing.
The Reinsurance Void and Solvency II: The global maritime insurance system is incredibly concentrated. Beneath the primary P&I clubs is the retrocession market, essentially the insurance policy for the insurance companies. However, this roughly $60bn global retrocession market systematically excludes acts of war, focusing almost entirely on natural disasters.
Because there is no global maritime equivalent to TRIA (which backstopped aviation after 9/11) or TARP (which backstopped the banks in 2008), the global reinsurance market holds this catastrophic tail risk entirely naked. Furthermore, they are bound by European Solvency II regulations, which force reinsurers to hold massive, strictly calculated capital reserves based on a 99.5% Value at Risk model.
But how do you statistically model the probability of a ballistic missile hitting a tanker? More terrifyingly, how do you price risk when the IAEA has officially confirmed that 440.9 kilograms of 60% highly-enriched, weapons-proximate uranium is currently unaccounted for amidst a violent regime transition?.
You just can’t, the statistical model (used for the VaR calculation) completely breaks down. And when the model breaks, regulatory capital requirements mechanically skyrocket to infinity. Reinsurers face a binary choice: raise billions in capital overnight, or cut their exposure immediately. They are legally and financially forced to walk away.
The 2008 Repo Market Parallel: This is the exact same mechanism that froze the interbank repo market in September 2008. The insurance market hasn’t withdrawn because they think every single ship will sink; they withdrew because the cost of verifying the risk of any single transit now vastly exceeds the relatively small premium they collect for the voyage. When verification costs invert the transaction economics, the market doesn’t just reprice, it seizes completely.
The Alpha is in The Timeline Mismatch: This brings us to the multi-trillion-dollar mispricing currently sitting in the equity markets. Investors are pricing in a 4-to-8 week kinetic military campaign, assuming that the moment a ceasefire is signed, the tankers start moving and the oil starts flowing again.
But an actuarial blockade does not end when the bombing stops. It only ends when teams of actuaries in London can confidently rebuild their statistical risk models, convince their regulatory compliance officers, and slowly negotiate the reinstatement of coverage.
Based on the 2008 repo-market freeze and the recent Red Sea insurance disruptions, this reinstatement process could take 6 to 18 months.
The broader market is mispricing the duration of this economic shock by over a year. That specific timeline mismatch dictates exactly how we must position our portfolios.
The Cascading Fractures
What makes this crisis uniquely dangerous is not just the oil shock, but the convergence of simultaneous, structural fractures across the global economy. We are looking at a systemic failure across multiple interconnected domains.
The Fertilizer Fracture (Food Inflation):
This specific fracture is severely under-discussed in the mainstream financial media, but it is absolutely vital to human survival. Roughly 33% of the entire global fertilizer trade transits through the Strait of Hormuz. Iran happens to be the world’s third-largest exporter of urea, and all seven of its massive production plants are currently shut down.
Because modern agriculture relies on a just-in-time supply chain with zero strategic reserves sitting in silos, timing is everything. We are entering the critical Northern Hemisphere spring planting window; if farmers miss this application window, global crop yields for the entire year will plummet. Benchmark urea prices jumped up to 17% within 48 hours of the disruption. Make no mistake: losing the Middle East in the fertilizer market is functionally like losing another China to the global supply chain. Food inflation is going to violently surge right behind energy inflation.
The Petrodollar Fracture (Treasury Liquidation):
This impacts the very core of the US financial system. Gulf sovereign wealth funds hold an estimated $240-360bn in direct US Treasury exposure. With the Strait closed, their massive oil export revenues have collapsed instantly to near zero. But these nations still have massive domestic economies to run, public sector salaries to pay, and subsidies to maintain.
They are facing an immediate and massive cash burn, forcing them to liquidate their most liquid assets: US Treasury bonds. My models estimate that a prolonged 3-to-6 month disruption could force the liquidation of $50-150bn in US Treasuries. Flooding the open market with bonds drives prices down and yields up, aggressively tightening global financial conditions exactly when the Federal Reserve is completely paralyzed and handcuffed by rising food and energy inflation.
The Importer Squeeze (Europe & Asia): Global energy importers are facing an existential threat that extends far beyond the price at the pump.
Europe (The Deindustrialization Threat): Following the targeted attacks, QatarEnergy halted production at its massive Ras Laffan complex, the world’s largest LNG export facility. Consequently, European TTF natural gas futures spiked roughly 60% almost immediately. Europe’s heavy industrial base was already deeply strained and hollowed out by the 2022 loss of Russian pipeline gas. It simply cannot absorb another massive, sustained input cost shock without severe and permanent deindustrialization.
Japan (The Currency Channel): Japan is uniquely vulnerable, importing nearly 100% of its crude oil, with the vast majority originating in the Middle East. The massive daily financial drain of paying inflated energy prices in U.S. dollars risks completely crashing the value of the Japanese Yen. A Yen freefall could force the Bank of Japan into emergency, economy-breaking interest rate hikes just to defend the currency.
China (The Oil Squeeze): Roughly 50% of China’s seaborne crude imports transit Hormuz. The most exposed actors are Shandong’s independent refineries, which process a dominant share of Iran’s crude exports and depend heavily on a structural discount to maintain positive margins. Without this cheap feedstock, their profitability evaporates.
Taiwan (The AI Bottleneck): This is where the geopolitical shock directly threatens the AI supercycle. Taiwan, the heart of the global semiconductor industry and home to TSMC (which I recently covered), requires immense, uninterrupted baseload power to manufacture advanced chips. Yet, the island sits on a highly precarious 11-day strategic reserve buffer for LNG, and roughly 33% of its gas is sourced from the Gulf.
