Hermitage Capital Management CEO: If Hormuz stays closed, Putin wins
Summary
- The closure of the Strait of Hormuz (20% of global oil flow) creates a massive economic dislocation, with Russia emerging as a primary beneficiary since its oil exports do not rely on this route.
- Peace talks between Russia and Ukraine are characterized as an "illusion" designed to buy time; Putin is betting on Western fatigue and the depletion of financial support to win a war of attrition.
- A new era of "asymmetric warfare" has emerged where cheap ($20k) drones deplete expensive ($4m) interceptors like Patriot missiles, forcing a shift in military strategy and procurement.
- European inflation is set to spike again due to disrupted LNG flows and potential Russian gas cutoffs, weakening Europe's economic resolve.
Trade Ideas
The Strait of Hormuz, which facilitates 20% of the world's oil, has been effectively shut down by Iran. Russia is a "big winner" because its oil logistics do not depend on this strait. With Middle Eastern supply choked, global oil prices must rise to ration demand. While Russia benefits, US investors cannot legally buy Russian assets. The logical proxy is to buy non-OPEC, non-Hormuz oil production (US Shale and Majors) which captures the price spike without the logistical blockage. Long oil futures (USO) and US Energy equities (XLE) to capture the supply shock premium. Rapid reopening of the Strait of Hormuz or a diplomatic breakthrough lowering geopolitical risk premiums.
Putin has floated halting gas supplies to Europe, and LNG flows have already been disrupted, causing European natural gas prices to rise dramatically. The combination of intentional supply cuts by Russia and logistical disruptions in the Middle East creates a scarcity squeeze. As Europe scrambles for alternative sources, global LNG prices (and US export demand) will surge. Long Natural Gas exposure as supply constraints tighten ahead of potential shortages. Warmer than expected weather in Europe reducing demand; rapid resolution to shipping disruptions.
Energy prices (oil and gas) are spiking in Europe, adding "inflation to our numbers" and causing economic pain that Western populations struggle to stomach. High energy inputs are a tax on European industrial productivity and consumer spending. If inflation resurges, the ECB may be forced to keep rates higher or the economy will stall (stagflation), making European equities unattractive compared to the US. Short European Equities (VGK) due to the disproportionate economic damage caused by the energy shock. European government subsidies effectively shielding consumers/industry from energy costs.
Peace talks are a delay tactic; Putin intends to keep "putting soldiers into the meat grinder" until the West collapses. Ukraine has run out of Patriot missiles. The war is not ending; it is turning into a prolonged war of attrition. This necessitates the continuous replenishment of munitions and high-end interceptors (Patriots made by RTX). Western governments must restock depleted inventories regardless of the immediate battlefield outcome. Long Defense Primes as the "illusion" of peace fades and long-term procurement contracts are enforced. A sudden, genuine geopolitical settlement or a total cessation of Western funding.
There is a cost asymmetry in modern war: $20,000 drones are forcing defenders to use $4 million Patriot missiles. We are in a "new world" of warfare. The current economic model of defense is unsustainable (shooting down cheap drones with expensive missiles). Defense spending must shift toward cost-effective drone systems and cheaper counter-drone solutions to restore the balance. Companies specializing in unmanned systems benefit from this secular shift. Long Drone/Unmanned Systems manufacturers as global militaries adapt to the "new world" of asymmetric aerial threats. Legacy defense primes developing internal competitors that crush smaller pure-play drone stocks.
