The enormity of the moves last week has barely sunk in as oil prices danced on the trap door of year-to-date lows to eventually finish better than from where they started. WTI improved week-on-week by $3.32/barrel (+4.52%), Brent by $2.85/barrel (+3.71%), Heating Oil by 2.12c/gallon (+0.91%), RBOB by 7.27c/gallon (+3.14%) and Gasoil by $7.50/tonne (+1.05%). It really did not matter the market, last Monday's panic in equities brought out the vulnerability in confidence of investors at present and oil's fraternity acted in kind. Eventually, sense and confidence returned in oil because no matter how exposed the world might be to pricing assets in Japanese Yen, nothing can undo the present fear of an expanding conflict in the Middle East. Certainly, the fear does not add up to barrels being withdrawn from the market, but the deterioration in diplomatic language, belligerent military action from Israel in a quarter of its compass zone coupled with stories of stealth missiles in Iran's arsenal and this morning's news of the US sending a missile laden submarine to the area should rightly be viewed with a worried gaze. Israel is also now expecting an attack from Iran this week.

Tension is also increased by Ukraine's incursion into the Kursk area in which Russia warns that it poses a direct threat to the nuclear power station located less than 50 kilometres from the combat area. Such is the geopolitical churn within energy markets that not even Tier 1 data from across the world will be enough to divert all attention, as is normally the case. There are PPI, CPI and Retail Sales from the US. House Price Index, Fixed Asset Investment, Industrial Production, Retail Sales and Unemployment from China. EU and Japan GDP and from the UK CPI and GDP . Despite it being August and despite an assumption markets will be quietened, last week's action and the incredible range of drivers available for interpretation this week, all of us must keep our wits about us.

What sanctions?

The murky waters of international trading while under sanction are becoming even more muddied in a multi-faceted, intriguing geopolitical climate. Sanctions seem to be policed by instigators only when it does not harm the economies of themselves or those of allies. This was very much the case when sanctions in varying forms were handed out to Russia after the Ukraine invasion as Europe tried to wean itself from the cheap gas and oil flowing in from the East, and indeed continues today. Ukraine’s Naftogaz still has a contract in place with Gazprom, worth according to analysts $2 billion-a-year, which is valid until January next year. Austria, Italy, France, Hungary, Slovakia to name but a few receive gas either from Russia or at least via Russian-owned pipelines. How the Ukrainian incursion into Russia’s Kursk region and the Sudzha pipeline affects deliveries, which is already pushing on gas prices, plays out in deliveries and contracts remains to be seen, but the point is sanctions have trimmed deliveries not stopped them. Convenience and parochial interest in energy supply security far outweigh publicly declared indignation and arms sales.

Various blocs of allies also bandy together to shun sanctions, some overtly, others covertly so. Apart from gas, oil is a monetary artery for Russia’s economy, and it is so for Iran too. The Atlantic Council coins a fine phrase when describing an ‘axis of evasion’. This refers to China being the major beneficiary of sanctioned oil and estimates that it saved the economy some $10 billion in 2023 by receiving sanctioned oil from the pariahs of world opinion. Iran will now receive greater attention in how it produces petrodollars because of the growing tension in the Middle East with proxy and threatened direct involvement in warfare exchanges with Israel.
Because of ready customers that disagree with or at least have ambivalence to Western concerns, Iran boasts increasing confidence in exports backed up by a growing customer base. Recently in June, Minister of Petroleum, Javad Owji, took to the airwaves announcing that crude production had increased to 3.6mbpd, the highest amount since reimposition of sanctions after the Tump administration withdrew the US from the nuclear deal in 2018. According to Argus, Iranian officials are attributing ‘methods of circumvention’ and ‘energy diplomacy’ for the reason such increase in oil production has also seen exports hit 1.6mbpd since the start of the year. Such is the confidence that Owji went on to say that ‘no government in the U.S can stand in the way of Iran’s oil production and exports regardless of who takes power in Washington’. Bold indeed, bearing in mind The Donald’s historical attitude towards Iran.

Yet with methods of circumvention using a growing dark fleet, ship-to-ship transfers, foreign exchange creativeness and using other nations as country-of-origin, it does appear as if more Iranian oil is set to get to water. Returning to the braggadocio of Mr Owji, in July he revealed that seventeen nations were receiving oil from Iran and included even some destinations in Europe, although there has not been validation to the European claim. However, there does seem to be conviction in the claims of new customers. United Against Nuclear Iran (UANI) was in the news on Friday across various wires as the source of information on exports and new destinations such as Oman and Bangladesh earlier this year. It would also appear the downturn in the fortunes of the Chinese economy has not yet diminished appetite for Iran’s feedstock, although the geography of delivery might have changed. According to Reuters, using data from Vortexa and Kpler, Shandong has been the usual port of call for Iranian crude but because of refinery margin issues, the independent processors that populate the province no longer find Iran’s oil viable. Instead, increased deliveries have found their way into Dalian, the northern city. Between 124,000-164,000 barrels per day are being delivered maintaining China’s imports of up to 1.5mbpd from Iran.

Such continuance of sales and what amounts to aggressive marketing has seen Iran’s oil contribution to the economy increase from $9 billion in 2020 to a currently predicted $28 billion for 2024. With the increase in monies comes the equivalent increase in ability to fund policy, foreign or domestic, ideological or military. Sanctions then cannot be working. Workarounds as outlined above are very much part of the economic tools needed for recipients to avoid being caught, and the ingenuity of the side-stepping is increasing. It is also true that the customer base cares not for Western values and the biggest client, China, is a global power free to defy US led sanctions. Finally, with resources of the United States, its technological and banking powers beyond all on the planet, is it really unable to quell circumvention? Many join in with the thought that it is deliberate. Oil prices are such an emotive part of US political concerns and a bane for controlling inflation that to take Iran’s oil from the market can only mean a rise in prices. Avoidance, consumer belligerence and sketchy enforcement mean that sanctions at present do not mean very much and in judgement are failing.
 

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