Oil prices step into the morning sharply higher as the world watches in wonder and fright at the daily suffering emerging from Gaza and Israel. This morning, attention is turned to yesterday’s bombing of a hospital where estimates ranging between 300-500 people have been killed. Local authorities blame Israeli airstrikes, Israel blames a Hamas rocket barrage that went awry. Jordan clearly blame Israel and has cancelled its hosting of a summit between the leaders of the US, Egypt and Palestine. King Abdullah described the attack as ‘a shame on humanity’ and Jordan officials went on to say that there is only one thing to discuss and that is the ending of the war, a meeting is not needed. This turn of diplomatic fortunes again garners fear of conflict-spread and therefore the leap in oil.

Geopolitical tension aside, oil benefits from other drivers including a draw in the overnight API Crude inventory. The reduction by 4.4 million barrels is much larger than the forecasted -0.3 and with a draw at the Cushing storage hub of 1 million barrels against a TankWatch prediction of -0.45, the idea of crude tightening and storage tank ‘bottoming’ finds new vigour. Products also posted draws in inventory with Gasoline down 1.6 million against a -1.1 call and Distillate down 0.6 million against at -1.4 call. Running with the bulls for a change, China turns up with data that bring hopes of a corner turned. Not only did year-on-year Q3 GDP growth rate beat expectation (4.9% versus 4.4%), September YoY Industrial Production was 4.5% versus 4.3%, YoY Retail Sales 5.5% versus 4.9% and the unemployment rate was 5% versus a 5.2% call.

The wider investment suite is not reflective of oil. In fact, the plight of energy markets are part of the reason bonds and bourses cannot keep hold ground due to inflationary effects. However, what is more pressing for the traditional investment tools is yesterday’s booming retail sales in the US. It would seem that personal behaviour is little changed in the current high interest rate climate, for the September increase of 0.7% way outstrips the 0.3% expectation. While FEDwatch still only prices a US possible rate hike in November at 11%, it now has January at 50%. Market relationships remain fractured along with investor confidence and while the debacle in the Middle East unfold, they are likely to remain so.
 

Time for a sanctions rethink

Iran enjoys a peculiar affinity with sanctions, after all until the Ukraine invasion it held top spot in the league of who had the most. If it were not for the difficulties endured under the global restrictions, sanctions have become something of a badge of honour and useful political tool for Iran when framing itself as an underdog and persecuted state. It is an extraordinary truth on how well Iran has managed to function given such international pressure and, from its point of view, particularly pernicious interference from the United States. This ‘coping’ behaviour is borne out of an unprecedented history of sanctions that covered the back quarter of the 20th century and all the 21st. Arguably, it was earlier and in the 1950’s, when Iranian oil was boycotted by Great Britain and the US after the nationalisation of the Anglo-Iranian Oil Company, but it was not sanction as seen through today’s understanding and a western-backed coup put paid to anything that might have developed into such.  

The listing of all sanctions imposed on Iran by the US to date would run to spreadsheets, but the modern start was in 1979 after the overthrow of the Shah and the taking of US hostages from its embassy in Tehran. This learned behaviour of sanction versus ‘cope’ stems from these proceedings. At the time the US imported some 500,000 barrels per day of Iranian crude and was the easiest of sanction target. However, and because of the contemporary world demand, Iran found ready buyers elsewhere, for the US had failed to procure sanction allies and in what chimes well with current conditions, Iran still managed to get its oil to water.  

Advance the clock forward, through other sanction incidents, to arrive in July 2015 when the Joint Comprehensive Plan of Action (JCPOA) between Iran and P5+1, namely the five permanent members of the UN Security Council; China, France, Russia, United Kingdom, United States + Germany is signed. The agreement involved Iran ridding itself of enriched Uranium, limiting heavy water production used for atomic purposes and reducing centrifuges. For Iran’s part, proof of compliance to these terms would relieve it from nuclear sanctioning by the UN, the USA and the EU. A relatively calm 2-year period ensued from 2016 on President Obama’s lifting of the most damaging authority, until President Trump withdrew from the JCPOA in 2018 citing intelligence from Israel that Iran was acting in bad faith even after the International Atomic Energy Agency (IAEA) had at the time given reports of Iran’s adherence. In a foreign policy speech on May 8, 2018, President Trump blustered, ‘[t]he Iran deal was one of the worst and most one-sided transactions the United States has ever entered into.’ He went on to offer an egregious list of Iran’s wrongdoings, slapped back on the relieved heavy sanctions and a few more for good order. However, and in repetition of failing to consult let alone garner accord from allies, the EU proceeded to block the US order from its jurisdiction enabling Iran commerce to get to market.  

The US sanctions on Iran are the most rigorous in the world and have caused severe economic harm such as high inflation and poverty, trade deficits and a Rial that this year hit a record low against the US Dollar. But this is nothing new for Iranians, this is life. Even after several reports of recent civil unrest, they seem to peter out as quickly as appearing, whether through the intervention of the clerical leaders or lack of rebellious appetite is open to conjecture, but evidence suggests that sanctions-effect is limited. In March of this year, U.S. Treasury Secretary Janet Yellen acknowledged that despite the economic effects of U.S. sanctions on Iran, the desired change in behaviour has not occurred. ‘Our sanctions on Iran have created real economic crisis in the country, and Iran is greatly suffering economically because of the sanctions … Has that forced a change in behaviour? The answer is much less than we would ideally like’ she admitted (Reuters).

The United States has failed thus far to line up its supporters when dealing with Iran. It also operates in different political circles and mindsets and Iran, through its coping mechanisms and playing the underdog card, continues to negotiate the punitive and restricted trading barriers lined up against it with practiced art. Estimates now have Iranian crude exports in excess of 3-million barrels per day despite sanctions and the US ability to track Dollar transactions. The use of ‘sleeve’ trading or alternative payments has allowed ever-increasing amounts of Iranian oil to get to welcoming destinations such as China and probably India to name but a couple. The recent atrocity in Israel and the current tragedy unfolding in Gaza means that sanctions and their effectiveness on Iran will have to be addressed, particularly if its (Iran) involvement is proven.  

Even if the US learns the lesson of creating an international cabal that agrees to hold true to sanctions, can the world really do without the suggested 3-million barrels per day? In current conditions the price of crude will rocket, so will inflation and out of the window will jump the good work of the world’s Central Banks. President Joe Biden is turning up in the Middle East with a couple of aircraft carriers and copious amounts of diplomatic bonhomie, but as of this morning no-one to talk to. However, his administration at some point will have to deal with Iran, its sanction busting, its belligerence and its predilection in ‘coping’ if it is to take the huge twitch-factor of Iran out of the oil price reckoning and Middle Eastern interference. The question, therefore, is whether sanctions should be lifted, be it tacitly or officially? The answer is a yes/maybe, but with the current carnage yet to abate, the US is unlikely to do so soon.
 

Overnight Pricing