While below we conduct a negative swipe at the efficacy of sanctions in the many faceted issues facing Iran and its oil supply, any attack on its nuclear facilities brings a whole new set of emotional connotations for oil prices. First reported on CNN overnight and taken up by all forms of media, it reports on the US obtaining new intelligence suggesting that Israel is preparing to strike Iranian nuclear facilities. CNN do not name its sources but talks of American intelligence intercepting Israeli messaging and how military movements might suggest such a strike. It tempers the news by outlining a difference of opinion within the US Administration on whether Israel will undertake such a frightening and inflammatory act, but Iran’s refusal to place uranium enrichment on the negotiating table with the US is clearly a motivator. Whether or not this is a diplomatic feint is a dangerous game and the imagined fallout, not exactly an inappropriate word, of such an attack has oil quarters ruminating on Iran striking out elsewhere in retaliation or disrupting shipping in the Persian Gulf and prices have reacted accordingly. It comes at a time when Israel has dialled up the tension in the Middle East with its fresh purging within Gaza. This has caused international derision with some countries such as Canada, France and the UK considering sanctions on Tel Aviv. Given such geopolitical anxiety, the Crude inventory build in the API data of 2.5mb is largely ignored even with an expectation that a 1.3mb draw would occur. The sentiment of the morning will have the market likely concentrating on the 1.4mb and 3.2mb draw in Distillate and Gasoline respectively.

A case against sanctions

One wonders whether sanctions in their many and varied forms truly ever achieve the outcome envisaged, such is the invention of human cunning, the intricacies of international trade and even the half-heartedness in enforcing them. This note could run to reams if it exampled how the US has doled out sanctions over many years and the paper they generate in governments and legal quarters equate to the pulp of a fair-sized forest. Notwithstanding the antagonism felt by the targets of restriction, there is international consternation on the weaponization of the US Dollar as each new sanction encourages those that wish to move away from the world’s marker currency. The Peterson Institute for International Economics uses the example of Haiti and Panama when and where eventual military force was needed to achieve the goals of their Washington Administrations at the time. PIIE observes, ‘extensive empirical research on the effectiveness of economic sanctions throughout this century suggests that these two cases are not unusual. Since 1970, unilateral US sanctions have achieved foreign policy goals in only 13 percent of the cases where they have been imposed’.

The US is hardly about to back up sanctions with troops on the ground in Russia and Iran, that way nightmares and world wars lie. This is why sanctions must be incrementally ratcheted up, there is little alternative. A broad-brush announcement of sanctions on Iran is followed by specific parts of industry, followed by specific customers of oil exports, followed by specific individuals and their energy networks and so on and so forth. Sanctions mistakenly envisage compliance by those that are targeted. Circling back to the top of this page and how necessity has become the mother of invention in terms of non-compliance, Iran has become just as adept as Russia in both getting oil to where it needs to be and petro-payment returned.

Although it seems Iran’s allies are disappearing as quickly as Israel targets them, one of the nation states aiding and abetting oil sanction circumvention is Malaysia. Tehran and Kuala Lumpur have strong cultural, religious and growing economic ties and both have sought to distance themselves from Western influence. This is why Malaysia is an enabler and a ready ‘sleeve’ for Iran’s exports of crude oil bound for China. This first came to light in 2022 when China’s imports of crude from Malaysia were higher than its production and indeed historical exports. In 2023 China was importing 1.1mbpd from this sanction laundering source and tailed off under Joe Biden’s softened stance on oil movements for fear of oil price inflation after the onset of the Ukraine war. The Donald now prowls his favoured field of tariffs and sanctions and by the look of Chinese data, the Iranian Supreme Leader, Ayatollah Khamenei’s doubts yesterday as to the success of any talks with the US appears to have been prejudged by reconvening the Malaysian insurance policy.

China’s customs data in April showed zero imports of crude oil from Iran. However, and using Reuters calculations, imports from Malaysia soared to 1.93mbpd, which while being down 6.3% from a month earlier, have increased by 96.9% year-on-year. The Malaysian two-step is back on and while the US figures out how it can construct sanctions to curb this dance around the rules, Iranian crude is not busting the gunnels at Kharg Island, even as 2 million barrels of extra storage is added, it is making good on journeys to the customers of Shandong. Short of parking aircraft carriers across the Strait of Hormuz, which would send Brent to $100/barrel, the US may spool off as many restrictive trade practices as it likes. Iran, Malaysia and China are qualm-free in avoiding them and have developed the necessary workarounds. Unilateral sanctions sound good in announcement, make for magnificent legal jargon on paper, but are proving to be ineffectual on those that have no care for the US and Western alliances. The world craves a peaceable outcome in the embittered relationship between the US and Iran, but how so these negotiations eventually settle now seems some way off. Meanwhile, between the ability of Iran to get its oil to water and OPEC’s ability to cover a shortfall if it cannot, the nuclear negotiations influence on the price of oil is over-egged, unless of course they produce a military strike from Israel.

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