“America will always have core interests in ensuring that Gulf energy supplies do not fall into the hands of an outright enemy, that the Strait of Hormuz remain open… We can and must address this threat ideologically and militarily… But the days in which the Middle East dominated American foreign policy in both long-term planning and day-to-day execution are thankfully over – not because the Middle East no longer matters but because it is no longer the constant irritant, and potential source of imminent catastrophe that it once was. It is rather emerging as a place of partnership, friendship, and investment – a trend that should be welcomed and encouraged. In fact, President Trump’s ability to unite the world at Sharm el-Sheikh in pursuit of peace and normalisation will allow the United States to finally prioritise American interests”
That went on a bit longer than I thought and we have referred to it before, but it is worth another look. It’s a direct quote from a paper written by the White House called National Security Strategy of the United States of America, published less than a year ago in November 2025. It essentially outlines the US view of the rest of the world, including for example its relationship with NATO. It’s a really good example of the perils of forecasting and extrapolating the current situation, if nothing else.
I was reminded of it again having been to an interesting commodities presentation last week.
Ever since the US invaded Iran there has been a large amount of commentary about the crude oil price, mostly along the lines of why isn’t it higher? It has been about $100 per barrel for some time now, but crude oil is an intermediate product – you and I don’t buy it, only around 700 refineries around the world do.
The real end product that you and I are direct or indirect buyers of is diesel, which hit the headlines over the weekend. Trump appears to be so worried about the diesel price he has agreed to buy some from Russia. We wrote at the beginning of the year – before the Iran war started – that the number one US voter concern at the then relatively distant mid-terms was the cost of living, or inflation. Now the mid-terms are almost upon us, and the US is mired in an inflationary war of choice in the Middle East.
The diesel price is more complicated than the oil price. It is made up of the crude oil price plus the cost of refining and the cost of shipping. Typically, the premium for shipping and refining in the diesel price is around $20, but it is now about $100. The diesel price is around $200 at the moment having increased about 120% year to date.
The cost of refining oil has been increasing. Typically, around 85m barrels of oil are produced per day around the world which needs to be refined. Around 7m barrels are refined in Russia, and Ukraine has been attacking refining capacity in Russia with drones for some time. Until relatively recently Russia has been able to fix and reinstate capacity about as fast as Ukraine has destroyed it, but over time Ukraine has increased the range of its attacks and Russia is no longer able to keep repairing capacity fast enough. As well as buying diesel from Russia, Trump has been telling Ukraine to stop attacking oil refining capacity in Russia.
There is also around 1.5m barrels of refining capacity north of the Strait of Hormuz which has been either damaged in the war or ships are not able to transport out. Refined oil tankers are much smaller than crude oil tankers and the theory seems to be that if you’re going to sail a ship down the Strait of Hormuz, you might as well make it a bigger one. To me this sounds like the logic of someone who is never going to be on any of these ships, but this is the sort of thing we sometimes hear when finance types try to talk about real things thousands of miles away.
The cost of these ships – especially the very large crude oil tankers known inventively as Very Large Crude Carriers (VLCCs) – has increased dramatically this year from $30,000 per day up to $1.2m per day from the Middle East to Asia.
What this means in practical terms is that while the crude oil price may be $100 on the screen and this feels “low” given recent events, the price of a barrel of crude oil by the time it lands in let’s say China is closer to $130-$150 due to shipping costs which are usually much more negligible per barrel, and you still need to refine it.
This isn’t just about an abstract large scale macro picture; there are more relatable real- world examples. Filling your car up is the most obvious, but around 5 million German homes have heating oil (diesel) tanks in their gardens which they use for their central heating. They have historically been quite efficient diesel traders. They buy in the seasonally cheaper summer months then obviously use it in the winter.
However, when the US invaded Iran just as Spring started to arrive, Trump told these people the conflict would last only a few weeks, so they seem to have held off buying. Now the weather is turning colder, the war is still going, the diesel price is still elevated, and the tanks are still empty. They will become forced buyers at almost any price in the near future.
We also discussed the state of the war and when it might end. Not as a forecast or prediction of course, but there is an ongoing study of armed conflicts over several decades at a Swedish University called the Uppsala Conflict Data Program (UCDP). The program has collected data and studied every international and domestic armed conflict it can find since 1975.
One of the key findings from the historic data is that some conflicts start and end very quickly – Venezuela for example. But once it hits about six months, the probability increases that it carries on for at least a year and beyond. Part of the reason for this is that wars are relatively rarely “won”, but more usually “lost”. In the early days of the Iran war there was a lot of talk of an “off-ramp” for the US. Trump tried several times to declare victory and decide it was all over but that’s not really how it works. He really needs Iran to admit defeat which it hasn’t shown much sign of doing.
It’s already Q4 and if these historical precedents are any guide at all, then all this is set to continue into 2027, and we have already seen more volatility in markets in 2026 including a significant developed market government bond sell off. We have also already seen a fall in valuations across equity markets including the US which is on around 19x next twelve month earnings – well below where it was last year.
With the S&P up 15% year to date, this narrowing of the multiple is driven by the market not keeping up with earnings, reflecting some short-term caution rather than anything more serious at this stage.
Robert Fullerton – Senior Research Analyst
FPC26782
All charts and data sourced from FactSet
Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at Sterling Court, 17 Dix’s Field, Exeter, Devon EX1 1QA. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of Robert Fullerton, Senior Research Analyst. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.
