The rise of the security premium

As investors and markets begin the week, many may be focused on a disruption in the Strait of Hormuz. We believe such focus is misplaced, despite 20% of global oil and gas supplies transiting the chokepoint each day.

The Strait is extraordinarily difficult to close for an extended period of time in a bilateral US-China world, though mines could make them difficult to transit for two to three months. Without Chinese cooperation it would be nearly impossible for Iran to close the strait for an extended period, and Chinese, Iranian, and Russian vessels could continue to pass through. They have their own insurance, payment systems, and security systems, which allows them to elude sanctions and detection.

We think disrupted flows could potentially exceed 100 million barrels as many vessels were moored, rig crews evacuated, and Western insurance difficult to come by. In the immediate term, we may see large releases from already depleted US strategic reserves. However, we believe this will pass just as a hurricane passes through the US Gulf with the current “kinetic” storm expected to fade over the course of the week to ten days.

While oil prices could spike 5-10% (European gas 20-30%) on Monday, which will get most of the headlines, it won’t be the most important outcome. For the foreseeable future, energy prices need to reflect a security premium. We are unlikely going back to just-in-time energy. We would expect prices to remain high and volatile even as the disruptions absorb what remains from the so called “oil glut” at sea, a narrative that never fully appreciated the fragmentation of the world into a US-bloc and a China-bloc that increasingly requires two supply chains.

The security premium in energy prices we described in The New Joule Order is becoming reality. For markets, the implication is that the security premium is not a spike to be faded. It may reflect a structural repricing, driven by hoarding and potential Iranian asymmetric warfare. This dynamic builds upon the same structural issues of under investment in the old economy and heavy asset industries, which have already driven a security repricing in metals further compounded by what we call the “weaponization of the periodic table.”

Asymmetric risks are rising

Iran's asymmetric doctrine prioritizes areas where the concentrated force is absent, which is not Hormuz — and the map of global chokepoints presents multiple alternatives. The US aircraft carrier USS Abraham Lincoln is in the Arabian Sea, the USS Gerald R. Ford is in the Eastern Mediterranean Sea, and the Houthis own the Red Sea. Who is protecting Mozambique's LNG (liquified natural gas) coast?

Clearly, the persistence of such asymmetric warfare is dependent upon regime change. The Islamic Revolutionary Guard Corps (IRGC), which is the regime, is intact. Iran activated its constitutional succession within hours — a three-member transitional council of President Masoud Pezeshkian, Supreme Court Chief Justice Gholam-Hossein Mohseni-Ejei, and Guardian Council cleric Alireza Arafi is already operational. Without boots on the ground, we estimate the probability of regime change at 30% or less. This implies a base case probability of 70% or higher for a protracted asymmetric campaign, including cyber activity, terrorism, and proxy forces that could engulf Iraq, the second-largest producer in OPEC.

OPEC creeps closer to capacity

Yesterday, OPEC+ agreed to a 206,000 barrels per day (b/d) increase for April — a gesture that translates into perhaps 80-90,000 actual barrels given chronic quota under-compliance due to the inability of many producers to reach their quotas. The remaining three million b/d of capacity in place represents capacity that is increasingly theoretical for members outside Saudi Arabia and the UAE. Non-OPEC growth was already decelerating as shale productivity plateaus and lower 2025 prices eroded capital spending. With demand now rising for security reasons, supply flexibility constrained and OECD inventories below normal, this tightens balances materially through the second half of 2026, even without physical disruption.

European Gas (TTF) most exposed, not oil

LNG may see the most significant repricing. Europe is uniquely exposed in that it is neither energy-long like the United States, nor in the China-bloc that can secure Russian pipeline gas. Europe's dependence on seaborne LNG, much of it from Qatar transiting both Hormuz and the Red Sea corridor, creates double chokepoint exposure. Unlike oil, the LNG market entered 2026 with genuinely ample supply. In our view a market positioned for abundance suddenly demands security, the repricing is not linear; it is convex. TTF may get the biggest bid.

Hoarding likely to accelerate

As we argued in Just-in-case, the instinct to hoard is rational under coordination failure. When you cannot trust that supply will be there tomorrow, you secure it today. We anticipate that China and India will demand higher strategic stock levels of energy and every other critical commodity. China has been building reserves at roughly one million b/d throughout 2025 and this conflict provides the catalyst to accelerate. The so-called oil glut at sea — much of it sanctioned crude in Chinese-insured vessels invoiced through the Cross-Border Interbank Payment System (CIPS) — is expected to be absorbed as strategic inventory by the buyers who have access to it. India faces its own calculus: heavily dependent on Middle Eastern crude and liquefied petroleum gas (LPG) it must decide how deeply to commit to the CIPS payment architecture to maintain Russian supply. A one-way revolving door.

Renewable investment driven by security, not environmentalism

Energy security crises produce the same structural response: the search for sources that do not require crossing borders and global chokepoints. Solar, wind, and nuclear are children of the 1970s oil shocks — with growth driven by security, not environmentalism. In 2024, 700 gigawatts of new solar and wind were deployed globally, five times faster than all other sources combined. China surpassed one terawatt of installed solar by mid-2025. Nuclear generated a record 2,667 terawatt-hours with 70 reactors under construction across 15 countries. Every gigawatt of domestic capacity is a gigawatt that does not transit Hormuz, the Red Sea, or the Panama Canal.

This is not a rupture, but an evolution of the deglobalization that began in 2022 — the shift from just-in-time to just-in-case, the repricing of security above efficiency. Every commodity that must cross a border will carry the cost of the oldest lesson in political economy: security comes first.