Trump’s Iran Oil Market Gamble

Yves here. The White House claims it has the Saudis lined up to pump more oil to compensate for the loss of supply that would result from the US announcement that it would impose sanctions on buyers of Iran’s oil. From the Financial Times:

The White House said it had worked with Saudi Arabia and the United Arab Emirates to ensure there was “sufficient supply in the markets” to compensate for the loss of Iranian exports.

Oil prices tonight and tomorrow will show whether Mr. Market believes that or needs to see more production.

Frankly, even though Trump owns this move, John Bolton’s fingerprints are all over it. The question is why Pompeo is on board with this. Iran has already cleared its throat. From Bloomberg:

Iran will close the Strait of Hormuz, a waterway vital for global oil shipments, if the country is prevented from using it, a senior military official said on Monday in what appears to be a response to the U.S. plan to end waivers on Iranian oil exports.

Colonel Lawrence Wilkerson, in a new Real News Network interview, is alarmed by the Administration’s move. The transcript is not yet up, but from the summary:

“This administration, for all intents and purposes in my view, is working against the interests of the United States,” Colonel Larry Wilkerson told The Real News Network’s Marc Steiner. China and Turkey have already said they will not abide by the U.S. ending of the waivers, but India will possibly follow along, all of which could lead to a more profound trade war….

Steiner noted that the sanctions violate international law and asked whether this brings the U.S. closer to war with Iran, or if the sanctions are “in lieu of war.” Wilkerson explained that John Bolton wants war even if Trump does not, and that regardless, these oil sanctions are “economic warfare”—an especially risky international gamble.

By Tim Daiss, an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets and geopolitics for Forbes, Platts, Interfax, NewsBase, Rigzone, and the UK-based Independent (newspaper) as well as providing energy markets analysis for subscription newsletters. Originally published at OilPrice

Global oil prices started the week by spiking around 3 percent on reports that Washington was preparing to announce that all buyers of Iranian oil will have to end those imports soon or face U.S. sanctions. Reuters cited a Washington Post article and sources stating that the U.S. will announce the termination of Iranian oil import sanctions waivers on Monday.

The waivers move, granted by Trump in November, shocked global oil markets and created a supply overhang that the OPEC+ group of producers is now working to eliminate. Countries that received 180-day waivers last fall include Japan, China, India, South Korea, Taiwan, Italy, Greece, and Turkey – all of Iran’s biggest oil clients.

Oil Prices Spike Early Monday

Prices for global oil benchmark, London-traded Brent crude rose as much as 3.2 percent in early Monday trading, to $74.30/barrel. It’s the highest price point since November 1. U.S.-benchmark, NYMEX-traded West Texas Intermediate (WTI) crude futures spiked as much as 2.9 percent in early Monday trading, reaching $65.87/barrel – the highest point since October 30 and just before Trump announced sanctions waivers for Iranian oil.

The sanctions waivers put in place by Trump particularly caught U.S-ally, OPEC de facto leader and the world’s largest oil exporter Saudi Arabia by surprise as well. As discussed in my April 20 post, since Trump didn’t consult with Riyadh before granting Iranian oil waivers, it resulted in an uptick in global oil supply and downward pressure on prices, costing the Saudis and other major producers lost revenue. Since that time, Saudi Arabia has largely been immune to Trump’s tweets calling for the Kingdom and OPEC to pump more oil to reduce oil prices which are at five-month highs.

The Reuters report added that Secretary of State Mike Pompeo will announce today “that as of May 2, the State Department will no longer grant sanctions waivers to any country that is currently importing Iranian crude or condensate.”

Other media outlets on Monday morning, Asia time, were also verifying the reports. The London-based Financial Times said that a U.S. official had told them that Pompeo would announce on Monday, U.S. time, and an end to the waivers which expire in early May. Earlier this month, the U.S., took the unprecedented step of branding Iran’s Revolutionary Guard a foreign terrorist organization, the first time formally labeling part of a foreign government as terrorists. These developments underscore Trump’s apparent push to bring the Iranian economy to its knees an in-effect force regime change, a stance not lost on leaders in Tehran who claim that such a scenario is impossible.

Likely Ramifications

If Pompeo does carry through with the announcement, it will put considerable upward pressure on global oil prices, even as Trump has recently called on the Saudis and OPEC, via Twitter again, to increase production to bring prices down. It will also likely cause global oil inventory levels to revert to a shortage of the commodity – in effect creating the opposite market scenario that Trump has asked for and needs as the 2020 presidential election cycle kicks in.

However, it’s also possible that Trump is raising the geopolitical ante with Iran, figuring that with the loss of Iranian barrels from the market in addition to the OPEC+ production cut still in place and the loss of barrels from Venezuela and Libya, that Saudi Arabia will be forced to take action and ramp up production. After all, it was the Saudis, according to numerous reports, that influenced Trump to reimpose crippling sanctions against regional foe Iran last year.

Trump could be hedging that he is just calling in a favor again from Riyadh. However, it’s a dangerous gambit since the Saudis don’t’ always follow the same logic as Western leaders, particularly in global oil markets. Case in point: In late 2014, as U.S. oil production at the time was creating a global oil glut, the Saudis abandoned their decades-long role as the market’s swing producer and instead of trimming production to tighten global oil supply and support prices, the Kingdom ramped up production instead to protect market share which within the space of fewer than two years created the worse oil crash in a generation. Prices fell from more than $100 per barrel in mid-2014 to dipping below the $30 per barrel price point in January 2016.

Trump’s move, if the reports pan out, could either be a stroke of geopolitical genius or could amount to little more than a poorly played call that will hurt global oil markets and worse yet for him, dim his chances of re-election in 2020.

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26 comments

  1. barrisj

    Posted a similar story earlier from Reuters…never made it out of moderation (ca. 4pm PDT).
    My sense is that the ME producers (and Russia) may test new ceilings in pricing, raising production ever so slightly to keep panic-buying on the futures markets only just in check, and playing a waiting game vis-à-vis the Iranian response to “no-waiver” policy. Trump and Pompeo are way out of their league with the Opec heavies, and if one sees a continuing strong upward move in US petrol pricing at the pump, it’s impossible to predict what this crowd will do.

    Reply
  2. kimyo

    dim his chances of re-election in 2020.

    if bolton gets his war, trump gets to run ads like this: “like my daddy used to say, never change horses mid-stream” (from: wag the dog)

    beforehand, bernie will clearly vote against, but after it’s begun and oil is back up over $100/barrel, will he vote to fund the war against iran?

    Reply
  3. Jonhoops

    Gas prices here in LA are over $4.60/gal at the pump.

    Good luck to Trump if prices continue to rise. Let’s not forget that one of the triggers in 2007/2008 was the spike in oil prices (which reached the 1973 oil crisis levels when adjusted for inflation).

    Reply
    1. Anon

      The Electoral College makes California inconsequential to Trump’s re-election. (Unless millions of voters in the state fund the opposition campaign with mucho dollars.)

      Reply
  4. cat sick

    So trump is trying to negotiate a trade deal with China and he now says, oh and you cant buy any oil from Iran because we tore our deal up with them and now we say so, plus as a bonus you get to pay higher prices for all your imports of oil, Makes a lot more sense for China to work to buy discounted Iranian oil in RMB and remove the USD from the whole equation ….

    Reply
    1. Procopius

      Yeah, that’s what they said they’re gonna do. A number of European countries are trying to establish a financial channel to sidestep SWIFT, the dollar-oriented clearing house. This whole thing of obeying the Netanyah and Likud is causing real harm to America’s interests, and it’s clearly going to get worse. Pompeo, of course, is a believer in bringing on Armageddon to force God to abandon His plans and do what the Evangelicals want. I don’t think anybody knows why Bolton has this self-harming obsession.

      Reply
      1. Synoia

        A number of European countries are trying to establish a financial channel to sidestep SWIFT, the dollar-oriented clearing house.

        SWIFT is funds transfer system. It is not a clearinghouse, the Bank of International Settlements is the clearing house.

        What the US is doing is threatening any institution which does business with Iran with Sanctions, to prevent them from transacting US Dollar business. World trade is based on the US dollar, so the threats are effective.

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  5. Ignacio

    PK suggested the other day that high oil prices could be considered a feature to help the financials of shale oil companies and I wonder how much of this is in the game.

    Reply
    1. PlutoniumKun

      I can’t find a link to it right now, but several quite well informed commentators have written that a key driver behind the Iraq invasion (certainly in Cheneys calculations) was US oil majors desperate to push up prices – at the time Saddam was dumping all the oil he could pump on the market to keep his cash flow. They were less interested in seizing the oil than in cutting off the flow and restoring Opecs strength so they could get back to profitability.

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      1. jsn

        This could explain the majors recent forays into fracking: I can see how they might think a stunt like this could last just long enough to get a golden parachute strapped on.

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      2. TimmyB

        Control over oil was the key reason for the Iraq invasion. However, “control” never meant “opening up the spigots and driving down prices.” Instead, it always means “doing with Iraq oil whatever profits US oil companies the most.”

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      3. Adam Eran

        Greg Palast says the importance of the Iraqi invasion was that it kept the oil in the ground… All that fracking and offshore oil is much more expensive to extract than the Iraqi oil.

        Reply
  6. Bobby Gladd

    “The White House claims it has the Saudis lined up to pump more oil to compensate for the loss of supply that would result from the US announcement that it would impose sanctions on buyers of Iran’s oil.”

    By turns, Trump has touted our now- “net energy exporter” Trump “dominance” AND has whined about the Saudis not pumping enough. If we’re exporting, net, we don’t need Mullah Oil, right? We should see low, low everyday domestic pump prices.

    I know, I know. Silly me.

    Bolton and Bibi want war.

    Reply
    1. rjs

      we’ve only exported net a few weeks…our oil situation is that we need to import around 6 million bpd of various grades of crude to meet the specs of our refineries, while we have to export or blend around 3 million bpd of fracked crude that’s too light for our refineries to use…we approach “net exports” only after that imported oil gets refined and exported as product…

      Reply
  7. The Rev Kev

    Probably a cause of this attack is that the US is now producing a surplus of oil through fracking. It cannot last long of course but it is true at the moment. This being the case, Trump does not really have to worry about the US oil supply be disrupted right now. If other countries have their economies being slowed down or disrupted because they are being blackmailed by stopping oil imports from Iran, Trump would not care at all. But I think that Trump wants to establish the principle that it is the US that determines who can trade with which country.
    At heart it is a policy to maintain US dominance where it can. I was just reading how the Russians have now put on Russian built engines on their new passenger jet , MC-21-300, to replace the American Pratt & Whitney engines currently used. The US denied Russia composite materials for use in the wings too so this had to be sourced from Asia instead. In the military field, they are threatening countries that order Russian gear such as Egypt, Turkey, China. This is to force those countries to buy US gear instead. The principle is the same. It is the US that says who can trade with whom.
    But getting back to Iran, no country can tolerate such a blatant attempt to cripple and destroy its economy and the Iranians will react. They must know that this is only a temporary condition which if they can get through, will cripple further US options in this region. Maybe they will hold war games in the Persian gulf. Possibly they will help movements like Hamas, Hezbollah, the Houthi, the Taliban and any other force which can cause trouble. Almost certainly they will ally themselves even more with China and Russia. Certainly they will be playing the long game while Trump plays the November 2020 game.

    Reply
    1. Procopius

      I don’t believe they can do much to help the Houthi. Geography is against them, because the U.S. Navy declared a blockade of Yemen in 2015. They have land routes to Hamas and Hezballah. I don’t know how much they’re supporting the Taliban, but I think not much. The Taliban, as I understand it, are an ultra-conservative form of Sunni, very like the Wahhabi. I think it’s primarily the Pakistanis who support the Taliban.

      Reply
  8. Carolinian

    dangerous gambit

    That seems to describe everything Trump does, no? All gambit, no plan. Perhaps the question is whether Trump will be able to climb down from this gambit as he did from the NK gambit and may be in the process of doing from the Venezuela gambit. Lack of impulse control looks to be a big issue with DT.

    Reply
  9. Frank Little

    It’s interesting that Trump’s attempts to assure markets of adequate supply hinged on Saudi Arabia rather than US shale. Like other NC readers I’m familiar with the shaky financing of fracking (to say nothing of the horrible environmental costs), but one would think that touting US shale production would fit with Trump’s anti-climate and America First thinking. Most shale production is right in the heart of his base of support too.

    Reply
  10. Peter

    that Saudi Arabia will be forced to take action and ramp up production.

    Now, why would the Sheiks do that if they are smart? Sure, it will push the frack oil also in better territory, but that play is time limited anyawy. The more they push that production, the faster the wells will deplete.

    Reply
  11. Chauncey Gardiner

    Would be nice if we could become a peaceful nation under a system of representative democracy and civil rights that constructively contributes to resolution of major issues confronting humanity, including the U.S.; rather than dancing to the sclerotic mindset and corrupt values of a small group of individuals who place militarism, Empire, authoritarian political and social control, extreme personal wealth, environmental degradation, and their personal beliefs above all else. The U.S. and the other two nations whose political leaders are most engaged in establishing this sanctions policy comprise less than 5 percent of the world’s total population. Neither Iran nor Venezuela are security threats to the United States or our allies, despite all the organized programs of propaganda and persuasion intended to have us believe otherwise.

    Reply
  12. kernel

    I can no longer ignore the fact that my country (USA) has become a rogue state, a danger to our world, to civilization, possibly to the fate of Life on Earth.

    It’s not (just) Trump. The invasion of Iraq was not the first time the US military was used for “regime change”, but it was our Rubicon, marking the change from Republic to Empire. I credited Obama with attempting to turn back the tide, but looking back, it’s obvious that he failed. Trump ostensibly ran against the “deep state” bogeyman, but he doesn’t really care who really calls the shots – he’s happy with the illusion of power. His narcissism leaves him open to manipulation; Bolton & NeoCons know how to stroke him (“Obama weak; Trump Strong! Who’s a good President? Yes, you are! Sign here…”) to get his approval/acquiescence for their tragic schemes.

    After the collapse of the USSR, the “Western System” (international finance/capitalism backed by US military hegemony) became the Global system. That system has done some good things – notably, elevating a couple billion humans from grinding poverty into middle-class lives. Unfortunately – but perhaps inevitably – the Banksters who inadvertently implemented this (by transferring Capital – and jobs – from 1st World to 3rd) siphoned off too much of the flow for themselves. Declining standard-of-living among working class Americans created the conditions for electing a demagogue who pretends he will change the system.

    There’s nothing new about US militarism; it’s almost 60 years since Eisenhower’s warned us about the Military-Industrial (-Congressional) Complex. But the NeoCons who fomented the invasion of Iraq have continued to expanded their influence in key Federal bureaucracies (State, Treasury, Pentagon), creating a truly dangerous Deep State. Perhaps more dangerous, the same forces seem to have taken over US (“MSM”) journalism. These are the forces which are egging us toward war with Iran.

    The new “sanctions” against Iran are tantamount to Blockade, which is traditionally considered an act of War. Until now, other countries have had to knuckle under (with rare exceptions like North Korea, surviving behind China’s skirts). The US military is still #1, but our economic dominance has slipped to the point where other countries will (soon?) be willing to defy our bullying.

    I hope that MANY other countries reject US sanctions against Iran. I also hope that they find ways to do this gently – and that the US reacts reasonably – to avoid various possible calamities (war, economic collapse, etc).

    Reply
  13. Susan the other`

    Let me count the adversaries: sometimes Canada, sometimes Mexico; always Cuba, Venezuela and Bolivia; at least half of Ecuador, Peru, Chile, Argentina; always China; sometimes Japan, usually Russia, most of SE Asia, all of Iran, sometimes Turkey, recently Egypt, maybe Sudan, probably 80% of all Europeans and a high percentage of the UK. Scandinavia seems neutral. India seems neutral but hates Pakistan whom we support… We really don’t have any staunch allies left. And we want to start a war for (imo) the Caspian that will become a global war? How long will it take for our opponents to just decide to get it over with and nuke the crap out of us? What can they possibly look forward to if they cooperate? More of the same. We couldn’t count on any pledge of cooperation because nobody trusts us. We’re on our own. I don’t like the odds.

    Reply
    1. Tony Wright

      I guess you just have to hope to hell that the world survives without too much Trump & Co. catastrophe until US citizens get a chance in 2020 to vote somebody in to the White House who behaves less like a narcissistic bull in a china shop when it comes to international relations. Fingers crossed.

      Reply
  14. mrtmbrnmn

    The evidence is piling up. Trump is a genetically stunted narcissistic adolescent. Blimpus Pimpeo and the monster Bolton are criminally insane. Add Satanyahoo and Prince MSoB to the terrible mix and you have a nuclear explosion of crazy. This is the way the world ends. With a bang AND a whimper.

    Reply

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