Operation Epic Fury, the joint U.S.-Israeli air campaign launched against Iran on February 28, is now in its 10th day and dominates every dimension of this week’s note: shipping, trade, geopolitics, and the global macroeconomic outlook. With markets experiencing a broad sell-off again today, much is in question. Below is our analysis of key data and the unfolding events.
GEOPOLITICAL UPDATE
Though press reports continue to pan the stated goals of President Donald Trump’s Iran campaign, four military objectives are coming into greater focus: (1) preventing Iran from obtaining a nuclear weapon; (2) destroying its missile arsenal and production capacity; (3) degrading its proxy networks; and (4) annihilating its navy.
Secretary of War Pete Hegseth declared at the end of last week that “America is winning,” alongside Joint Chiefs Chairman General Dan Caine, who announced uncontested control of Iranian airspace within the coming days. With 30 Iranian Navy ships sunk, B-2 and B-1B bombers operating uncontested, and over 2,000 targets struck, Caine asserted that Iranian ballistic missile launches are down 86 percent and attack drones are down 73 percent. As Secretary of State Marco Rubio stated on the Hill last week, “The hardest hits are yet to come. The next phase will be even more punishing.”
Beyond the military metrics, additional considerations to weaken the regime are emerging. The CIA is reportedly arming Iranian Kurdish opposition groups along the Iraq-Iran border, with President Trump speaking with Kurdish Democratic Party of Iran (KDPI) president Mustafa Hijri last Tuesday. At the same time, the United Arab Emirates (UAE) is weighing a freeze on Iranian assets held in Emirati banks-perhaps Tehran’s most important economic lifeline.
The biggest question of all is regime change. Should the Islamic Republic topple, who will step in and how much say with the U.S. have? Trump’s Friday announcement that there will be no deal with Iran “except UNCONDITIONAL SURRENDER!” marks a significant shift.
Following the killing of Supreme Leader Ayatollah Ali Khamenei, Iran was being led by a three-man interim council comprised of two hardline clerics and the country’s president. On Sunday, the Assembly of Experts announced it had chosen Mojtaba Khamenei, the son of the deceased Ayatollah, to succeed his father as Supreme Leader. President Trump quickly responded that he was “not happy” with the pick as the 56-year-old Khamenei demonstrates the Islamic Republic’s defiance. Despite the President’s desire for Western-aligned leadership in Iran, history offers no encouraging precedents for rapid democratic transition following an air campaign. Below, we highlight a number of pressing issues and areas of economic impact.
Shipping
Bloomberg ship-tracking data showed commercial traffic down more than 95 percent in the Persian Gulf last week, with the IRGC still claiming control. The Joint Maritime Information Center (JMIC) reported daily traffic dropping from an average of 138 ships per day to just two by last Thursday, neither of which were tankers. An estimated 3,200 ships representing four percent of global tonnage are now idle inside the Gulf; with another 500 waiting outside in UAE and Omani waters.
The few ships still moving are disabling their AIS transponders. This morning, a Greek-operated tanker carrying one million barrels of Saudi crude, the Shenlong, reappeared near India’s coastline after turning off its transponder last Wednesday, representing a rare case of an oil tanker making it through the Strait.
For commodities, the primary impact is crude oil, Qatari liquified natural gas (LNG), and sulfur exports used in fertilizer production and nickel refining. The latter creates downstream exposure in agricultural and battery supply chains.
Insurance withdrawal is creating a de facto blockade on its own with war-risk premiums surging. Norway’s Gard and Skuld, Britain’s NorthStandard, the London P&I Club, and the American Club have terminated protection and indemnity (P&I) insurance coverage effective March 5. As a result, Maersk, MSC, Hapag-Lloyd, CMA CGM, and COSCO have all suspended Gulf bookings. In light of this, President Trump directed the U.S. International Development Finance Corporation (DFC) to offer political risk insurance for Gulf maritime trade and pledged Navy escorts “as soon as possible.” The U.S. Navy, however, has told shipping industry leaders that it lacks the vessels to provide escorts.
The DFC issued a timely internal memo on February 20-the same day as the IEEPA ruling-signaling a shift toward “a greater focus on returns.” This could very well be an avenue towards President Trump’s sovereign wealth fund ambitions. Premium income flowing to the U.S. government rather than foreign mutual clubs would constitute meaningful capitalization. JPMorgan, however, estimates that over $350 billion is needed to underwrite all oil tankers in the Middle East. The DFC’s statutory cap-which was raised under the most recent National Defense Authorization Act (NDAA) in December-is limited to $205 billion (estimates believe roughly $50 billion is already committed by the DFC).
Oil Shock
Brent and West Texas Intermediate are currently trading around the $100 per barrel mark. While the Administration is asserting this is a temporary increase, Gulf energy officials believe otherwise. Following an Iranian drone strike on its largest LNG facility last week, QatarEnergy CEO Saad al-Kaabi told the Financial Times that even an immediate ceasefire would require weeks to months before LNG deliveries normalize. Asian buyers are now likely to outbid Europeans for available spot cargoes, prompting Qatar to declare “force majeure.” Kaabi warned crude could reach $150 per barrel within two weeks if the Strait of Hormuz remains closed.
Alternative shipping routes are a poor substitute. Vessels diverted around the Cape of Good Hope add 10 to 14 days each way, absorbing fleet capacity and multiplying costs. The Houthi threat to Suez shipping has not abated, creating a dual-chokepoint scenario.
The U.S. is partially insulated from the shock as the world’s largest oil producer and LNG exporter, but higher prices are a double-edge sword, benefiting domestic producers while hurting American consumers. European natural gas stockpiles are near seasonal lows, resulting in an acute surge for the Eurozone. That said, the war has disrupted a narrow band of commodities-crude and LNG-without spreading to electricity, coal, or North American gas markets.
During the 1973-74 crisis, petroleum accounted for nearly 25 percent of global power generation; today its share is below three percent. Brent, while elevated, is still below the $130 per barrel figure it reached after Russia’s invasion of Ukraine. Similar trends are seen in other areas of the energy market:
- European gas (TTF) is trading at €53/MWh, a fraction of the €300+/MWh record in 2022
- German electricity is also well below the 2022 peak of €800+, trading around €100/MWh
- Coal trades are just over $130 per metric ton against a 2022 high of $400+
- U.S. natural gas is below $3/MMBtu; in 2008, eclipsed $10
Partially offsetting are previously unsold Iranian and Russian barrels that are finding new buyers, as well as European hydropower reservoirs. Solar generation will provide an additional cushion for the EU headed into spring. National Economic Council (NEC) Director Kevin Hassett has also said that the Administration has a “whole flow chart of tools” available to address price surges. Already, the White House has announced a 30-day sanctions waiver for India to continue purchasing Russian oil and is weighing shipping-side measures.
Economic Outlook
The central bank dilemma is the same across the globe: is rising inflation anchored or transitory? A transitory shock allows the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) to focus on growth risks. But an anchored shock could force a return to rate hikes, a scenario the Administration will fight tooth and nail with the midterms looming.
Inflation re-acceleration and the President’s desire for rate cuts put pressure on incoming Fed chair nominee, Kevin Warsh. While Warsh’s nomination was officially submitted to the Senate last Thursday, the next two Federal Open Market Committee (FOMC) meetings (March 17-18 and April 28-29) will be held before he can be installed. Given current chair Jay Powell’s term doesn’t expire until May 15, and a likely protracted Senate confirmation process, Warsh’s earliest possible meeting would not be until June 16-17. Thus, Powell will make the next two rate calls. All this combined with the 10-year Treasury posting its biggest single-session advance since October makes this the most uncertain Fed succession since Alan Greenspan replaced Paul Volcker.
Two inflation data points arriving this week will sharpen the Fed’s outlook: Wednesday’s Consumer Price Index (CPI) for February, and Friday’s Personal Consumption Expenditures price index for January-the Fed’s preferred inflation measure.
Europe and the UK face more near-term vulnerability than the U.S. given lack of significant domestic energy production and structural dependence on the Middle East. Jet fuel prices in Europe have spiked to their highest level since Russia’s 2022 invasion, adding second-order inflationary pressure beyond direct energy costs. The EU’s planned ban on new Russian LNG supply contracts after April 25 is now very much in doubt.
On Bloomberg Economics’ high-end scenario, the EU and UK could absorb a loss of 0.6 percentage points in GDP growth and a 1.1 percentage-point rise in inflation. Those numbers could combine to form stagflation conditions. Oil’s GDP pass-through is substantially smaller in the U.S., however, as Bloomberg forecasts a 0.8 increase in U.S. inflation.
Bloomberg’s John Authers offered a counter narrative last Thursday, arguing that American financial markets are a clear winner of the current crisis. Non-U.S. equities have been in their strongest outperformance streak against the U.S. in years, creating stretched valuations and the conditions for a reversal. The Iran war may be that catalyst and the dollar again a safe haven.
Global Reactions
The reaction of China and Russia has been expected. CCP Foreign Minister Wang Yi convened an emergency call with Russian counterpart Sergei Lavrov the day after the strikes. Speaking through China’s Ministry of Foreign Affairs, Wang stated that killing a sovereign head of state is “unacceptable” and called for an immediate cessation of military operations. Russia’s Foreign Ministry called the strikes “a pre-planned and unprovoked act of aggression.” That said, neither China nor Russia is expected to provide direct military intervention or arms. In fact, Bloomberg reported that a Chinese state-media-linked account recently posted that “Iran has no real ally.”
By contrast, Canada, Australia, and Ukraine expressed support for the U.S. decision. Ukrainian President Volodymyr Zelenskyy noted that Russia had struck Ukrainian cities more than 57,000 times with Iranian Shahed drones, calling it “important that the United States is acting decisively.”
The EU predictably has called for “maximum restraint” and civilian protection. France and Germany have been cautious, stopping short of endorsing the operation while condemning Iranian retaliation. German Chancellor Friedrich Merz, who was in Washington last Tuesday, stated at the war’s outset that international law classifications bring “relatively little” to the discussion of Iran, and that it was not the time to “lecture our partners on their military strikes.” For its part, the UK deployed Royal Air Force (RAF) fighters to Qatar following a Shahed drone strike on Cyprus. The Cyprus attack represented the first direct hit on European soil.
More consequentially, a ballistic missile crossing Iraqi and Syrian airspace was intercepted by NATO assets in the Eastern Mediterranean. Debris fell in Hatay, Turkey, leading Ankara to summon Iran’s ambassador. Turkey’s foreign minister warned his Iranian counterpart that Turkey is “ready to take all necessary steps” to defend its territory.
Russia Factor
A fourth round of U.S.-led talks is tentatively scheduled for Geneva this month, with the Russians signaling that the meetings will be “decisive.” Leverage aftereffects of the Iran war will matter. The removal of Iranian Shahed drone production materially degrades Russia’s air campaign. But every Iranian missile fired at U.S. and allied assets in the Gulf draws down stocks of Patriot interceptors-the same interceptors Ukraine relies on.
For its part, Russia has lost standing as an unchecked aggressor. Iran came to Russia’s defense at the outset of the Ukraine invasion, supplying Shahed drones. But with Iran now under attack, the limits of Russian power are exposed: the U.S. has moved decisively against Iran, Venezuela, and Cuba without Moscow intervening. As Russia analyst and former Australian diplomat Bobo Lo put it, “Now he’s [Putin] no longer the baddest guy in town.”
Russia, of course, is not without leverage. Before Epic Fury, Urals had slid to nearly $40 per barrel against a $59 per barrel budget assumption, January oil and gas revenues had hit a four-year low, and the January deficit of 1.7 trillion rubles was the largest on record. The Brent surge, however, has moved Urals to ~$100/barrel and the Russian Federation back to a budget breakeven point.
Oil and gas are roughly a quarter of the Russian budget; even partial relief slows the drawdown of its National Wealth Fund (depleted from $113B to $52.2B since the Ukraine invasion). Refiners in India and China that had processed Iranian and Venezuelan crude barrels must now source substitutes, Russian Urals being the most available. With European competition for Russian LNG seemingly likely, the Iran war provides Moscow with needed fiscal relief. That said, the oil shock would need to be sustained rather than short-lived for Russia to fully balance its budget.
Munitions
President Trump posted on Truth Social Tuesday that U.S. stockpiles at the “medium and upper medium grade” have never been higher and that “wars can be fought forever” using current supplies. Pentagon spokesman Sean Parnell stated the Department of War “has everything it needs to execute any mission at the time and place of the president’s choosing.”
During the 2025 12-day offensive against Iran’s nuclear facilities, however, the U.S. fired a quarter of its total THAAD inventory. Conventional munitions can be flown in from existing stocks, but defensive missiles are finite and slow to replenish.
CENTCOM is estimated to have spent approximately $779 million in the first 24 hours of the operation and $630 million in pre-strike buildup. Sustained hostilities would run into the tens of billions of dollars. An expected supplemental appropriations request from the Administration will provide Congress with its first real leverage since the outset of the operation; a prospect Democrats will be quick to capitalize on.
U.S.-Israel-Arab Alliance
Operation Epic Fury marks the first public warfighting alliance between the U.S., Israel, and the Arab Gulf states. What started with the Trump 1.0 Abraham Accords, cleared the way for CENTCOM’s integration of Israel in 2021. Now, Bahrain, Saudi Arabia, the UAE, and Qatar have come the closest yet to aligning militarily with Israel.
In practice, U.S. carrier strike groups are coordinating and sharing intelligence with Israeli air forces and Gulf-based air defense networks; Patriot and THAAD batteries are defending Gulf infrastructure alongside Arrow systems defending Israeli cities. No mutual defense treaty exists between the U.S. and Israel and Gulf states operate under bilateral agreements rather than a collective framework, but the functional equivalent is now in place.
Saudi Crown Prince Mohammed bin Salman (MBS) has been the most vocal, stating that the Kingdom will take “all necessary measures” to protect itself. Pakistan, which entered a formal defense pact with Saudi Arabia last year, separately warned Iran against continuing strikes on the Kingdom, effectively invoking the bilateral security commitment. A nuclear-armed state with significant Iranian border exposure publicly signaling on Riyadh’s behalf is a meaningful expansion of the effective alliance.
Thus, the Abraham Accords framework gains new momentum in a war where Arab states and Israel are fighting the same enemy. An Iran-weakened Middle East is the precondition for the Saudi-Israeli normalization deal President Trump has long been pursuing. President Trump’s ability to hold Gulf states inside the alignment, however, depends on how quickly oil flows resume and whether Gulf infrastructure losses mount faster than military objectives are achieved.
TRADE UPDATE
China
Secretary Bessent, USTR Ambassador Jamieson Greer, and CCP Vice Premier He Lifeng are scheduled to meet in Paris this week (March 13-14) to lay groundwork for President Trump’s visit to Beijing at the end of the month. The agenda is expected to cover Boeing and soybean purchases, Taiwan, fentanyl, rare earth export controls, U.S. tariffs, and semiconductor equipment restriction. The U.S. is also considering raising large-scale Chinese purchases of Alaskan energy as a substitute for Russian oil. Bessent has reportedly drawn on counsel from former USTR Robert Lighthizer, retired Brig. General Rob Spalding, and analysts at the Asia Society and Hoover Institution.
On agricultural purchasing commitments, President Xi Jinping’s February offer to increase soybean imports was one of the few explicit gestures of pre-summit goodwill from the Chinese side. The Trump Administration’s success in locking in $2 billion-plus in soybean and wheat commitments from Bangladesh is a meaningful signal of the competitive dynamic playing out within China’s geographical orbit.
For its part, the U.S. has reportedly delayed a pending arms sale to Taiwan to keep the Beijing visit on track according to The New York Times. The Commerce Department has separately circulated draft regulations that could restrict AI chip shipments globally, which has faced internal White House pushback.
The summit will not be without friction. The combined disruption of Venezuelan and Iranian supply removes Beijing’s two principal below-market crude sources simultaneously. The Section 301 investigation into China’s Phase One compliance remains active providing the Administration’s trade team with a more tested legal tariff architecture rather than presidential proclamation.
Showing signs of economic stress, the CCP set its GDP growth target for 2026 at 4.5 to 5 percent, the lowest since 1991 and the first time the floor has dropped below 5 percent. The downgrade reflects a property sector in its fourth year of contraction, persistent deflationary pressure, weakening consumer confidence, U.S. tariffs, tech export controls, and the current oil price shock. Altogether, Bloomberg Economics estimates a 0.8 percentage-point addition to Chinese inflation.
China’s National Development and Reform Commission (NDRC) moved Thursday to address the oil shock, issuing verbal directives to Sinopec, PetroChina, CNOOC, Sinochem, and Zhejiang Petrochemical to immediately suspend diesel and gasoline exports and negotiate cancellation of already-committed shipments.
Lastly, rhetoric from Congress will continue to add stress to the visit. Both chambers continue to advance chip export legislation and House Select Committee on China Chairman John Moolenaar is pressuring the UK to rescind approval of China’s planned mega-embassy in London in light of recent espionage charges.
Donroe Doctrine
The Administration’s Western Hemisphere strategy continues to advance despite the Iran war. Three weeks ago, Joint Chiefs Chairman Gen. Dan Caine convened military leaders from across the region to press for deeper coordination on drug trafficking and transnational criminal organizations. That meeting shows signs of producing results. Last Tuesday, the Pentagon announced joint U.S.-Ecuador military operations against terrorist organizations inside Ecuador. U.S. Southern Command described it as a “powerful example of the commitment of partners in Latin America and the Caribbean to combat the scourge of narco-terrorism.”
Ecuador is not an outlier. Cuba represents the template’s clearest extension. On Friday, Trump told CNN that Cuba “is going to fall very soon.” The Trump-appointed U.S. attorney in Miami, Jason Reding Quiñones, has created a joint working group of Treasury, the FBI, and DEA to gather evidence for Cuban regime prosecutions targeting drug, immigration, and sanctions violations. The indictment of former Cuban President Raúl Castro, 94, could be the ceremonial end goal.
Finally, Interior Secretary Doug Burgum traveled to Caracas on March 4 for meetings with acting President Delcy Rodríguez and Venezuelan mining and oil executives. In addition to oil deals, the U.S. is seeking to issue mining licenses. Under U.S. oversight, Venezuelan oil exports reached 788,000 barrels per day in February, roughly double the prior month. That trajectory does not close the Hormuz gap, but it injects incremental barrels into a supply-starved market and re-routes crude that would otherwise have flowed to China. Mining licenses, if issued, would extend the same logic to Venezuela’s mineral sector which holds some of the largest gold, coltan, and bauxite reserves in the hemisphere.
IEEPA Refunds
Over 2,000 companies have filed suit, a fraction of the 330,000+ importers who paid IEEPA duties. Penn Wharton estimated total refund exposure at up to $175 billion; U.S. Customs and Border Patrol (CBP) has since confirmed $166 billion actually collected. While CBP stopped collecting IEEPA duties on new entries February 22, the Automated Commercial Environment (ACE) system has continued liquidating previously filed entries with assessed IEEPA tariffs.
In terms of process, the Administration’s request for a four-month stay was denied last week. At a March 4 hearing, CIT Judge Richard Eaton ordered CBP to halt liquidation of IEEPA duties and begin unwinding duties already assessed, with the order applying to all importers regardless of whether they had filed suit. At Friday’s follow-up hearing, CBP official Brandon Lord filed a declaration stating that the agency could not comply with Eaton’s immediate refund order. Instead, CBP announced it will have a new ACE system operational within 45 days, a process that will not require importers to sue.
The scale of the task is unprecedented: $166 billion collected across more than 53 million entries from over 330,000 importers. CBP’s existing technology cannot handle automatic refunds at that volume as Lord estimated manual compliance would consume more than four million staff hours. Under the newly proposed system, importers would file a single declaration through ACE and Treasury would issue one consolidated payment per importer, with interest.
Judge Eaton has since amended his order to remove the “immediate compliance” requirement, effectively giving CBP until approximately late April. The U.S. Chamber of Commerce called the 45-day plan “a constructive and practical proposal.”
As of February 6, only 21,423 of the 330,000 eligible importers had enrolled in the existing electronic refund system. The Administration is still expected to appeal the underlying Eaton order. Even with a functioning refund mechanism, the DOJ’s case-by-case challenge posture means procedural friction will continue for importers navigating the process.
Agriculture
USTR Greer and Agriculture Secretary Brooke Rollins published a joint op-ed in The Hill last week making the case that the Administration’s trade agenda is delivering wins for American farmers. They cite eight Agreements as evidence: Malaysia and Cambodia opening to U.S. beef, pork, poultry, and rice; the UK creating a $700 million ethanol channel; El Salvador removing fumigation and certificate barriers and accepting U.S. food safety standards; Guatemala committing to 50 million gallons of U.S. ethanol annually; Argentina providing duty-free access for U.S. beef, dairy, wine, spirits, tree nuts, and processed foods; Bangladesh committing to over $2 billion in U.S. soybean, soy meal, and wheat purchases; and Taiwan cutting or eliminating tariffs on nearly all U.S. agricultural products.
Miscellaneous
- 2026 Trade Policy Agenda: Released last Monday, the agenda reaffirms the Administration’s approach, citing a 17 percent year-over-year decline in the goods trade deficit since April 2025. Six priorities are named for 2026: continuing the current tariff approach, enforcing trade laws, securing critical supply chains, reviewing USMCA, managing trade with China, and promoting U.S. interests in international forums.
- Section 122: A coalition of 24 state attorneys general have filed suit with CIT, challenging the legality of the new Section 122 tariffs.
- Coming Attraction: The U.S. and Mexico will hold the first round of formal bilateral review talks next week with further rounds to follow on a regular cadence.
OUTLOOK/ANALYSIS. The Trump Administration has executed on the strategy it telegraphed in November-dismantling the China-Iran-Russia-Venezuela alliance. The Maduro capture, shadow fleet interdiction, and Iranian regime decapitation are sequential applications of the President’s foreign policy, not discrete events. The unified objective in all has been energy denial: a destabilized Iran removes both below-market supply Beijing has relied on for its industrial and AI build-out.
The next three weeks will be massive for the Administration via two metrics: the progress of the war amidst domestic consumer price pressure and the April summit with President Xi. Trump and Xi will meet over an entirely new chessboard from what existed at the end of October. With their own internal pressures, each leader will be searching for tangible wins. The state of the Iran war will decide who enters the summit holding the most chips.
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