Much Ado About Everything No 34: Iran/US — Dire Straits

The oil market should look beyond straightforward supply/demand as Iran/US tensions continue to rise.

In my Outlook for 2019 published on 6 January, I flagged what I saw at the time as a highly probable escalation in Iran/US tensions, including the following.

“Especially with [the midterm] elections out of the way, I find to hard to believe that Mr Trump will not look shortly to turn the screw still harder on Iran, not least because (as I wrote on 23 October) this is very popular with his pro-Israel white evangelical base.

I should at this point be very clear that, although I have frequently remarked that a ‘wag the dog’-type military action by the US is significantly more likely against Iran than North Korea, this is far from being my base case. But I certainly cannot rule it out — or, for that matter, a crisis-inducing miscalculation of some sort — especially as long as the likes of [US National Security Advisor] John Bolton have the President’s ear. In any case, there is much which falls short of a US strike which could not only further inhibit Iran’s ability to sell its oil internationally but also raise tensions generally in one of the world’s most vulnerable channels for hydrocarbons, ie the Strait of Hormuz.”

And so it has come to pass, as underlined by US Secretary of State Mike Pompeo’s 22 April announcement that the US will not be renewing waivers to its November 2018 sanctions against the purchase of Iranian oil which expire on 2 May.

The announcement saw a sharp uptick in the price of crude to a 2019 high of over USD75 per barrel for Brent in the middle of last week. Admittedly, this was followed by a sell-off of over 3% at the end of the week as President Donald Trump once again brought pressure to bear on Opec to pump more oil to make good the likely decline of Iran’s exports. However (including for reasons I explored in more depth in an article for Arab Digest — subscriber access only — at the start of last week), it appears very unlikely that Opec will succumb to White House pressure this time as quickly as it did in November when we saw a consequent crash in the oil price.

All of these developments have been well-documented in the press over the past week or so. But there was one article which, to my mind, stood out from ‘the pack’, ie Edward Luce’s opinion piece published in the Financial Times on 25 April, which I commend to anyone who has access to the FT and which should also be accessible from the Alavan Independent Facebook page.

Paraphrasing what I wrote about the article in question on Facebook, Mr Luce (of whom, regular readers may recall, I am a long-standing fan) may be a little too pessimistic; but, as I have opined previously on many occasion, if Iran does find its ability to export by sea at or near zero it may be tempted to try to close the Strait of Hormuz — with potentially very dangerous consequences.

Such a scenario fits with 'my' longstanding 'wag the dog' thesis noted in the quote from my Outlook at the top of this article which originates with top psephologist Nate Silver’s suggestion back in 2017 that Mr Trump might be tempted to start a war (with North Korea) in an effort to boost his approval ratings in the run-up to the 2020 elections. I stand by my view that this is by no means implausible while continuing to ‘favour’ Iran as the more likely target. But I have to acknowledge that Mr Luce may well be correct in suggesting that there is also a plausible scenario of Mr Trump being led, at least semi-unwittingly, into much earlier military action against Iran by Mr Bolton in particular — with Israeli Prime Minister Benjamin Netanyahu and Saudi Crown Prince Mohammad bin Salman egging the US on from the sidelines.

I would underline again that war between Iran and the US is not (yet?) my base case. But the investment community seems to be fixated on straightforward supply and demand and, therefore, ignoring the possibility completely. With both sides seemingly determined to continue to ratchet up tensions, this may yet prove to be a big mistake.

Alastair Newton