With The U.S.-Iran Deal Collapsing, How Exposed Are Oil Markets Right Now?

Even before the 30-day mark was reached in the 60-day negotiating process that would see the 14-point memorandum of understanding MOU agreed between Washington and Tehran crystallise into a full and final peace deal, the starting point for the whole process has been broken by both sides. U.S. Central Command CENTCOM and President Donald Trump stated that Iran had violated the MOU by firing on commercial vessels in the Strait of Hormuz, enforcing pre-approved shipping routes, and threatening to collect transit tolls. In response, the U.S. military restarted and expanded a series of consecutive nightly airstrikes against Iran, thus violating the same agreement. As a result, Tehran stated that the MOU had been voided, with top negotiator Mohammed Ghalibaf adding that Iran was "in an essential and existential war with America". With less than 30 days of the 60-day negotiation period remaining, what can the world oil markets expect next "The 60-day negotiating period isn't the key number," a senior Washington-based source who works closely with the U.S. Treasury exclusively told OilPrice.com last week. "The key number's the third of November, which is when the mid-terms [U.S. Congressional Elections] begin," he added. "Trump doesn't want to end his final term as president as a lame duck, so he wants to do well [in the elections], and that means producing a decisive result in Iran and keeping gas [gasoline] prices at levels that won't destroy his [electoral] chances," he underlined. In this context, as analysed in full inmy latest book on the new global oil market order, historical data highlights that every US$10 per barrel or so change in the price of crude oil results in around a 25-30 cent change in the price of a gallon of gasoline. And for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion or so per year in consumer spending is lost, so damaging the economy. The political importance of this is that since 1896, the sitting U.S. president and his party have won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only once out of seven occasions. The same pattern pertains to mid-term elections too, and although Trump cannot seek re-election, he will not only want to avoid being a lame duck figure in his last two and a half years but may also envision a Trump political dynasty that will require the goodwill of the Republican Party. As Bob McNally, former energy adviser to former President George W. Bush, put it "Few things terrify an American president more than a spike in fuel [gasoline] prices." The other key number here is four, as this is the price per gallon of gasoline above which U.S. presidents and their team become particularly nervous, as the price/consumption/growth correlations start to become very serious. At the time of writing, the average gasoline price in the U.S. was US$3.85 per gallon. Related Houthis Declare Naval Blockade on Saudi Arabia as Red Sea Crisis Deepens The problem for Trump and his negotiating team right now is that the Iranians know all these constraints. That is why it is in their interests to escalate military actions at this point, albeit to levels that remain under the line at which the U.S. would have no alternative but to make good on threats to embark on a full-scale attack on major civilian infrastructure targets across the country. "As oil prices edge up again, and gas prices with them, the Iranians are reminding us [the U.S.] of what could happen if there is a serious escalation of the war again, and none of the measures in place to mitigate these risks over time is available to us right now," said the Washington source. As analysed recently by OilPrice.com, the key measures to obviate disruption to the Strait of Hormuz -- through which up to a third of the world's oil is transported and about a fifth of its liquefied natural gas -- are not immediately available, with the U.S. oil industry already pumping at absolute record highs. Similarly, the release of further barrels from the strategic petroleum reserves of International Energy Agency member countries is likely to be more difficult following historically high releases in the past few weeks, and in any event may take months to kick in. In the meantime, other measures -- including meaningful new supply from Venezuela, Brazil, and Argentina, plus new pipelines circumventing the Strait -- will take at least two years to feed through into global supply. Meanwhile, a significant ballistic missile and drone attack against Abha International Airport in southern Saudi Arabia last week by the Iran-backed Houthis and subsequent threats against the Kingdom's oil facilities are aimed by Tehran to remind Washington that it could make good on a previous threat to close the Bab-el-Mandeb Strait too. This 16-mile-wide waterway, known as 'The Gate of Grief' in Arabic, flows between the west coast of Yemen on the one side, and the east coasts initially of Djibouti and then of Eritrea on the other, before it joins the Red Sea, and historically has seen up to 10% of the world's oil flows go through it daily. From the very beginning of the Israel-Hamas War, Iran has been weighing up the closure of the Bab-el-Mandeb Strait in addition to the Strait of Hormuz but has not pulled this escalation lever yet. "It's next up on the [escalation] ladder, we [the U.S.] think, and would clearly worsen the global oil picture, and the regional security picture as well, which gives Iran added leverage in achieving what it wants in the final peace deal," said the Washington source. Iran's goal by the end of the MOU negotiation period is to be given as close to everything it asked for in its own initial 14-point list of demands for ending hostilities, according to a senior energy industry source who works closely with Iran's Petroleum Ministry, spoken to exclusively by OilPrice.com last week. "This includes Israel out of Lebanon, the U.S. out of all its current positions in and around the Strait of Hormuz, the full lifting of international sanctions against Iran, and the US$300 billion in reconstruction money promised to Tehran," he said. "They also want the ability to control the reduction of its enriched uranium on site in Iran, albeit under the supervision of the International Atomic Energy Agency, and to maintain the current nuclear program for domestic power purposes," he added. All these factors together mean that the existential threat from the U.S. to the Islamic Revolutionary Guards Corps IRGC -- the guardians of the philosophy underpinning Iran's 1979 Revolution at home and the promulgators of those ideas abroad through its proxies -- would be gone. As analysed in full inmy latest book on the new global oil market order, the underlying purpose of the U.S. and its key allies in the original version of the Joint Comprehensive Plan of Action colloquially 'the nuclear deal' formulated by former President Barack Obama's team to its latest iteration under Trump was the eradication of the IRGC in its present form. Over time, Washington's idea ran, the unique financial, business, and political support structures for the IRGC across the basic fabric of Iran would be stripped away, and the Corps could then be rolled into the regular Iranian army. This, the U.S. view had it, would eventually prove terminal to the Islamic regime itself, which would be replaced by a democracy of one sort or another over time. For Trump, putting his name to a final agreement incorporating all these elements would be catastrophic for the ideological legacy he wants to leave as president. On the other hand, he cannot afford to escalate conflict with Iran to such a point that he and his Republican Party perform disastrously in the upcoming mid-term elections, leaving him as a lame duck administrative figure only. Not only would this damage the Republican Party's chances of securing the successive presidency, but in turn it would likely stymie any chance of his presidencies being used as a springboard for a Trump political dynasty to be constructed over time. It would also more clearly open the way for post-presidency criminal prosecution and indictments to be put together by Democrats, spurious or not. As such, say the Washington and Iran sources, Trump is most likely to maintain the current status quo -- military action that does not provoke further major escalation by Iran, within the overall framework of ongoing negotiations towards a final deal. That said, concluded the Washington source "After the mid-terms, however they go, all the shackles will be off Trump, and I don't think he'll stop until he gets the deal he really wanted, including regime change." By Simon Watkins for Oilprice.com