Energy

Trump’s Dangerous Oil Price Game Amid Stopping Waivers For Countries Buying Iran’s Oil

Fuad Muxtarlı Media Roundup 8 May 2019
Trump’s Dangerous Oil Price Game Amid Stopping Waivers For Countries Buying Iran’s Oil

Trump’s trade war may have depressed oil prices at the start of the week, but the U.S.’ decision to send warships to the Middle East is an ominous sign of a potential escalation in conflict with Iran. The oil market seesawed on Monday as traders tried to balance these two sources of instability.

The United States is deploying a carrier strike group and a bomber task force to the Middle East to send a clear message to Iran that any attack on U.S. interests or its allies will be met with “unrelenting force,” U.S. national security advisor John Bolton said on Sunday.

Amid rising tensions between the United States and Iran, Bolton said the decision was “in response to a number of troubling and escalatory indications and warnings.”

“The United States is not seeking war with the Iranian regime, but we are fully prepared to respond to any attack, whether by proxy, the Islamic Revolutionary Guard Corps or regular Iranian forces,” Bolton said in a statement.

It marked the latest in a series of moves by President Donald Trump’s administration against Iran in recent weeks. Washington has said it will stop waivers for countries buying Iranian oil, in an attempt to reduce Iran’s oil exports to zero. It has also blacklisted Iran’s elite Revolutionary Guard Corps.

The Trump administration’s efforts to impose political and economic isolation on Tehran began last year when it unilaterally withdrew from the nuclear deal it and other world powers negotiated with Iran in 2015.

“The United States is deploying the USS Abraham Lincoln Carrier Strike Group and a bomber task force to the U.S. Central Command region to send a clear and unmistakable message to the Iranian regime that any attack on United States interests or on those of our allies will be met with unrelenting force,” Bolton said.

Bolton, who has spearheaded an increasingly hawkish U.S. policy on Iran, did not provide any other details. A U.S. official said the forces “have been ordered to the region as a deterrence to what has been seen as potential preparations by Iranian forces and its proxies that may indicate possible attacks on U.S. forces in the region.”

The official, speaking on the condition of anonymity, said the United States was not expecting any imminent attack on U.S. forces.

Bolton has always had a particularly hawkish stance on Iran, and reportedly rattled the national security establishment months ago when he requested that they draw up plans for a military strike.

To Stop Iran’s Bomb, Bomb Iran

For years, experts worried that the Middle East would face an uncontrollable nuclear-arms race if Iran ever acquired weapons capability. Given the region’s political, religious and ethnic conflicts, the logic is straightforward.

As in other nuclear proliferation cases like India, Pakistan and North Korea, America and the West were guilty of inattention when they should have been vigilant. But failing to act in the past is no excuse for making the same mistakes now. All presidents enter office facing the cumulative effects of their predecessors’ decisions. But each is responsible for what happens on his watch. President Obama’s approach on Iran has brought a bad situation to the brink of catastrophe.

In theory, comprehensive international sanctions, rigorously enforced and universally adhered to, might have broken the back of Iran’s nuclear program. But the sanctions imposed have not met those criteria.

Naturally, Tehran wants to be free of them, but the president’s own director of National Intelligence testified in 2014 that they had not stopped Iran’s progressing its nuclear program. There is now widespread acknowledgment that the rosy 2007 National Intelligence Estimate, which judged that Iran’s weapons program was halted in 2003, was an embarrassment, little more than wishful thinking.

Even absent palpable proof, like a nuclear test, Iran’s steady progress toward nuclear weapons has long been evident. Now the arms race has begun: Neighboring countries are moving forward, driven by fears that Mr. Obama’s diplomacy is fostering a nuclear Iran.

Saudi Arabia, keystone of the oil-producing monarchies, has long been expected to move first. No way would the Sunni Saudis allow the Shiite Persians to outpace them in the quest for dominance within Islam and Middle Eastern geopolitical hegemony.

Because of reports of early Saudi funding, analysts have long believed that Saudi Arabia has an option to obtain nuclear weapons from Pakistan, allowing it to become a nuclear-weapons state overnight. Egypt and Turkey, both with imperial legacies and modern aspirations, and similarly distrustful of Tehran, would be right behind.

Ironically perhaps, Israel’s nuclear weapons have not triggered an arms race. Other states in the region understood — even if they couldn’t admit it publicly — that Israel’s nukes were intended as a deterrent, not as an offensive measure.

Iran is a different story. Extensive progress in uranium enrichment and plutonium reprocessing reveal its ambitions. Saudi, Egyptian and Turkish interests are complex and conflicting, but faced with Iran’s threat, all have concluded that nuclear weapons are essential.

The U.S. decision to send warships to the Middle East needs to be viewed in that context. Bolton, perhaps frustrated by his struggling regime change campaign in Venezuela, has turned his sights back to Iran, a perennial obsession of his.

The move comes only a week after the expiration of waivers on sanctions, and the U.S. is aiming to cut Iranian oil exports to zero. Trump is also looking at other non-oil sanctions as a way to squeeze Iran.

The surge in oil prices so far this year has been a supply-driven phenomenon, with OPEC+ taking 2.2 million barrels per day (mb/d) offline, a figure that includes the involuntary outages in Iran and Venezuela, according to Bank of America Merrill Lynch. “Iran's crude exports fell from a high of nearly 2.5mn b/d to a low of around 600k b/d in December before rebounding this year,” the investment bank wrote in a May 3 note.

“As sanctions waivers expire in May, we anticipate further pressure on Iran's exports and anticipate volumes will fall below 500k b/d in 2H19 and could even reach zero depending on how wary buyers are of sanctions.”

Overall global supply outages are now at a multi-decade high of 4 mb/d, the bank said. Historically, every 1 mb/d swing in supply balances equates to a roughly $17-per-barrel move in oil prices, the investment bank said.

However, while spot and short-term futures prices have climbed significantly this year, longer-dated futures have only moved up modestly. As Bank of America notes, spot prices are up $20 per barrel from December, but three-year futures prices are up only $6.

That makes it harder for U.S. shale drillers to hedge future output, which makes it trickier to grow production. In other words, the shale response could be more modest than most people think, at least until the back end of the futures curve rises further.

It also means that OPEC+ has been dealt a “very good hand,” as Bank of America puts it. There is less of a fear that restraining output will stimulate a massive shale response, at least much larger from today’s already record high levels.

Moreover, because Saudi Arabia needs higher oil prices to balance its books – Bank of America puts its fiscal breakeven price at about $93 per barrel this year – Riyadh will move slowly in bringing output back online. Bank of America puts the Brent floor price at about $70 per barrel.

The U.S. obsession with Iran puts further upward pressure on crude, and the moving of warships closer to Iran is worrying. The trick, from the Trump administration’s perspective, is how to escalate conflict with Iran (and Venezuela, for that matter) without sending oil prices soaring. High prices are a domestic political threat.

Judging by the reaction of the oil markets on Monday – slightly down during midday trading, but up later in the afternoon – Trump may have found the solution to this predicament. He ramped up the trade war with China at the same time that his administration escalated conflict with Iran.

Normally, fears of conflict in the Middle East would drive up prices. But those concerns were clearly offset by the perceived pitfalls to the global economy from Trump’s trade war. So, it seems, Trump can have his Iran conflict and keep oil prices in check at the same time. It may only cost us global economic stability.

 

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