Recent Items

Iran War: Expected Hardening of Iran Posture in Wake of Funerals for US-Israel War Martyrs; Iran Hits Two Tankers Transiting on Oman Side; China Buying Non-Iran Gulf State Oil, Opposes Iran Control Plans; Yet More on Oil Price Anomalies as Crack Spreads Widen Further

Posted on by

[Today’s Iran war post launched largely complete but your humble blogger had to run out briefly. Please return at 8:00 AM EDT or refresh this page then so as to see the final tweaks]

Escalation expert Robert Pape is sounding alarms that the effect of the massive funeral ceremonies for the martyred Iranian Supreme Leader, other officials assassinated at the start of the war, and the many civilian victims like the children in the Minab school will be to validate and intensify the entirely justified anger that many, likely most, Iranians feel. The Financial Times has estimated that the turnout will be 12 to 15 million. If it exceeds 15 million, that would top the largest funeral gathering to date, that for Indian leader C. N. Annadurai in 1969.

Pape’s new warnings come on his latest Substack post and on the channel At the Water’s Edge:

In the talk above, Pape describes how to ascertain if Iran is indeed toughening its stance in response to the overwhelming evidence that the public wants retribution and is willing to take more costs, including being on the receiving end of more US/Israel bombing or suffering more economic harm if the Strait of Hormuz row intensifies. His key indicator is whether Iran increases its demands, such as requiring the US abandon its bases in the Middle East. He also describes August 15 as a triple witching hour, when the MOU expires, the prospect of oil shortages will be imminent, increasing Iran’s leverage, and when Iran may also either be making new demands or making recently added ones hard red lines.

As Pape wrote in his Substack:

Leaders who might previously have worried about the domestic costs of prolonged confrontation have now witnessed an extraordinary public demonstration of nationalist solidarity. That makes it easier—not harder—to demand more.

Everyone is watching shipping in Hormuz.

What actually matters is Iran’s demands.

The consequences extend far beyond Tehran.

It means harder Iranian negotiating demands are now more likely just as the global economy approaches its most vulnerable period. The next two to three weeks may determine whether August brings elevated energy prices—or a genuine global economic shock.

The strategic question is no longer whether US-Iran talks eventually resume. It is whether the political conditions now exist for Iran to press for substantially greater concessions precisely when time is beginning to work in its favor.

As Pape suggests the struggle over Strait of Hormuz control continues to escalate, it does not merely mean ship passages will stay at their current “not high enough to prevent going over the oil cliff” levels but drop further, intensifying the supply crisis for oil and other important cargoes. That hurts many innocent bystanders far more than the US. Commentators have regularly pointed out that wealthy nations, and in particular the US, will be less harmed by choking the Strait of Hormuz than poor nations. Look at Sri Lanka, India, Indonesia and the Philippines as poster children.

This may seem like a secondary matter, but Putin has been explicit that when it comes to an existential threat, Russia is willing to take down the rest of the world.1 Iran does not seem to have confronted the conundrum, that to get its (entirely deserved) revenge on the US, if it uses the very blunt instrument of extended closure of the Strait of Hormuz, many forecast a worse-than-Great Depression-level economic meltdown. A world of extended supply chains, complex manufacturing processes, and need for critical materials means that when businesses fail, they have “for the want of a nail, the shoe was lost” knock-on effects. And when commercial enterprises dissolve and their staff moves on, they typically cannot be reconstituted. They need to be rebuilt. That is difficult to begin with and even more so in a setting of widespread want.

To put it more graphically: There remains no overlap between the US and Iran bargaining positions. If anything, per Pape, the gap is set to widen. But to punish the US and Israel, Iran will wind up machine gunning down a crowd to get to them.2 Some commentators have suggested that the reason Iran entered into the Memorandum of Understanding (MOU) as opposed to continuing to prosecute the war were the entreaties from nations suffering serious harm from the closure of the Strait of Hormuz.

Now to the escalating fight for control over the Strait of Hormuz. Keep in mind that the last trapped tanker reportedly exited, so the mini-surge from that supply trapped inventory getting to market is working its way through the system. As we have discussed in comments, and will review soon, the rush of shipments from Iran has largely not been sold but is sitting at sea. So once Mr. Market has digested the effect of the release of the supply captured in the Gulf, perhaps more commentators will focus on the actual new loading getting out of the Gulf to buyers. That looks to remain at best at its current ~25% of the old normal and may fall further if things hot up.

The reporting an the latest action on the Oman side of the Strait of Hormuz seems a bit more scattered than usual, so forgive me if some of these tidbits are disproven later. But two tankers on the Oman side most assuredly were hit, and in what no doubt is meant to be seen as an escalation, by virtue of Iran using ballistic missiles as opposed to the drones it had employed earlier. From Anadolu Agency in Iran resumes attacks on commercial ships in Strait of Hormuz: Report:

Iran’s Islamic Revolutionary Guard Corps (IRGC) fired at least two missiles at commercial ships transiting the Strait of Hormuz late Monday, according to a media report.

The US is likely to retaliate with strikes against Iranian targets following the attacks, said the Axios news site, citing two US officials.

Iran’s state broadcaster wrote on the US social media platform X, citing sources, that a Qatari oil tanker “intended to pass through the Omani route in the Strait of Hormuz with US Navy support but was targeted after ignoring repeated warnings.”

The report came after the UK Maritime Trade Operations (UKMTO) center said a tanker was hit off the coast of Oman, triggering a fire aboard the vessel.

UKMTO said it received a report of an incident 8 nautical miles east of Limah.

“A tanker has reported being hit by an unknown projectile on the port side causing a fire, whilst travelling southbound,” the agency said in a warning notice.

Bloomberg oddly mentions only one tanker being hit in Qatari LNG Ship Struck in Strait of Hormuz, Testing US Talks and has happy patter about other vessel transits:

A laden liquefied natural gas carrier was hit by a projectile near the Omani coast as it exited the Strait of Hormuz, heightening unease among shipowners and testing a US-Iran agreement intended to halt attacks in the waterway….

The strike has already raised fresh concerns among shipowners. Al Areesh, another LNG tanker that loaded in Qatar and was headed out of the Persian Gulf, appeared to turn before the strait on Tuesday before sailing in circles…

Other traffic continued to flow, however. A Japanese-flagged supertanker and another registered with Singapore appearing to sail through the strait on the Iran-approved route, together with a China-bound liquefied petroleum gas carrier. To the south, a convoy of at least six ships, including three very large crude carriers, appears to be approaching the Omani coastline on the way out of the Persian Gulf.

It also appears that Iran defeated US air cover:

Having said that, it is curious as to why Iran is engaging only in some interference on the Oman side. Its hopes that limited kinetic action would scare off nearly all ship owners has not come to pass. Admittedly, Iran may have decided not to make any big moves while the services for the Supreme Leader and other martyrs are still underway.

Or it may be that they decided that a few actual strikes that seriously damaged tankers would be sufficient for Mr. Market, here insurers and reasonably-prudent ship operators, to pull back. As Shanaka Anslem Perera said on Twitter:

Iran fired missiles at two civilian ships in the Strait of Hormuz overnight, according to two US officials, and the missiles were never meant to actually sink them.

The missiles were rather meant to reprice them.

The tankers were hit for using the route drawn by Uncle Sam and Oman instead of the one drawn by Iran, and a single strike on that lane does something a blockade cannot.

It makes this particular whole route “uninsurable”. An uninsurable lane is actually a closed lane, and Iran just found how to shut the strait without shutting it. Classic!!

Let’s follow the real mechanism here, because it is not the explosion. War-risk insurance on a tanker through Hormuz can leap from a quarter of a percent of the hull toward three, a barrier of several hundred thousand dollars per ship, per crossing.

One missile attack by the IRGC on the American route reprices every vessel behind it. Iran does not need to hit the next hundred ships. It needs the insurance underwriters to believe it might.

That is the classic paradigm nobody is naming right now. The strait now has two maps.

One drawn by Washington, hugging the Omani coast to bypass Iranian control.

One drawn by Tehran, demanding permission.

Nearly a third of tankers / ships chose the American line last weekend.

Last night two of them burned, and the message was not to those two. It was actually to the marine insurers of all the rest.

We’ll see in the next few days how key players react.

We’ve been pointing to articles in Links showing that European gas (now meaningly largely LNG) stockpiles are at dangerously low levels versus where they ought to be:

That situation got worse even before the Iran strike on the Qatar LNG vessel:

Back to commentary on the transits:

And on the “oil glut” versus “oil cliff” debate, as indicated at the top, it appears the last tankers trapped in the Gulf have finally escaped:

But China just bought a whole lot of crude, a big departure from its recent practice of drawing down inventories…and then from pretty much everyone ex Iran, and at a discount too!

Some experts disagreed vehemently with claims that the Gulf State discounts on oil meant the market was saturated:

Lloyd’s List lends support to this about scarcity of tankers and high operator charges in VLCCs and suezmaxes riding high as peace deal hikes Hormuz flows

  • West Africa-China VLCC rate index is at $127,708 per day, up from around $90,000-$100,000 per day prior to peace framework
  • US Gulf-China VLCC index is at $115,749 per day, up from around $100,000 per day prior to the peace agreement
  • MEG-China TD3C index is becoming a more relevant measure of physical fixtures; it is at $296,175 per day, more than double Atlantic indexes and TD3C’s pre-crisis level

Even with that explanation, some readers were surprised that China was not helping Iran by buying its oil,3 as it had during the days of the sanctions, and then at steep discounts. But that is based on the assumption that China is an ally of Iran, when China is also the biggest import supplier to Israel and third-largest buyer of Israel exports. China has and continues to support Iran in various ways but it would be a mistake to assume that the relationship rises to the level of an alliance.

In particular, China is not happy with Iran’s plan to control Strait of Hormuz traffic, and has said so more than once. Note that the issue is not fees but control. Shipping expert Sal Mercogliano unpacks why in a new talk:

From a lightly-edited machine transcript:

[Quoting an article headline] “China urges unimpeded passage of hormuz as fee chatter mounts.” So here’s China kind of jumping in here saying that listen, we don’t want fees in the Strait.

Now for China, this is really important because China is constrained by a lot of maritime passages. So this is a density map showing you the coast of China. So coast of China right along here all the way from Vietnam up to North Korea. But for China to get access to the sea, it runs through choke points between China and Japan, between the Japanese home islands by Taiwan, Philippines, and as you come down here through the South China Sea, through Singapore, Malaysia, Indonesia. I I mean, China is just constrained. If if you look at China, their entire coastline has a barrier across it. Nations like the United States don’t have that. There’s no impediment to leaving a US port and heading out. The only place that even comes close is is is Seattle where you have Canada to the north. Every other US port basically dumps out into the middle of the ocean which is great. China doesn’t. And so China doesn’t want to see unimpeded passages because of fear that that could be leveled against them by Korea, Japan, Taiwan, the Philippines, Indonesia, Singapore, you name it.

In other words, for China the issue is not even remotely money but setting a precedent that could harm its national security.

Contrast that posture with Iran basically talking past China’s concerns. From Bloomberg on July 4 Iran’s envoy to China says Beijing to get Hormuz concessions

Iran’s ambassador to Beijing said China and other friendly nations will be granted “special considerations” when Tehran determines the level and nature of service fees charged to ships using the Strait of Hormuz.

Abdolreza Rahmani Fazli said the critical waterway for energy supplies is now a matter of “national security” in the aftermath of the four-month US and Israeli war on the Islamic Republic. As such, “there will be new arrangements concerning the Strait of Hormuz with the collaboration and cooperation of the state of Oman,” he said.

“We will definitely have special considerations for China, because China is a friendly country,” Fazli said Saturday at the World Peace Forum in Beijing, without specifying what those concessions would entail. “Special treatment we should award to countries which are friendly to us.”

I doubt Chinese officials will take well to being condescended to by Iran. But what if anything will they do?

More on the state of the oil markets. Even mainstream commentators are clearing their throats about claims of abundant oil. From OilPrice in Fear of an Oil Glut May Be Overblown, Top Consultancy Says

Up to 75% of the previous oil flows through the Strait of Hormuz are expected to return to the market by the end of the year, but significantly lower oil prices aren’t guaranteed for 2027 as the ongoing U.S.-Iran tensions are unlikely to be resolved for good soon, Fereidun Fesharaki, chairman emeritus of FGE NexantECA, told CNBC on Monday.

Before the Iran war, the consultancy FGE NexantECA expected oil prices to be in the upper $50s low $60s per barrel next year. This could still be the case in 2027, but it rests on the assumption that a lasting peace will be reached, Fesharaki said.

Fesharaki said he personally sees as “impossible to imagine” a scenario in which the U.S. and Iran reach a lasting peace deal..

Other Wall Street banks have also started to predict a glut after the U.S. and Iran signed the MoU.

Morgan Stanley, for example, has slashed its oil price forecasts for the next 18 months as it expects the reopening of the Strait of Hormuz to accelerate a new supply glut.

Erm, Jeff Currie pointed out that Red Sea transits were 75% of the old normal a full two years after Ansar Allah had pretty much stopped its vessel target practice.

For nearer-term outlooks, Chris Martenson discussed the mystifying behavior of oil prices with Daniel Davis. He discussed why short interest is so large that is hard not to think a state actor is heavily involved. He also discusses the state of SPR inventories versus drawdowns, and has a very helpful graphic on the older versus newer design of the salt caves, and why the older ones can’t be emptied without destroying them.

However, Martenson’s discussion does not seem to fully allow for damage across all the caves which has the effect of raising the effective operating minimum. The big reason for the disparity in estimates and resulting uncertainty is the age of the salt caves (they have been in service far longer than intended when created in the early 1980s) plus poor management practices. From AAPG in 2016:

The U.S. Strategic Petroleum Reserve (SPR) is facing significant challenges related to the storage and availability of its crude oil resources. Approved for construction by the 1975 Energy Policy and Conservation Act (EPCA), the storage sites were envisioned to be needed for 25 years and are subject to an estimated five drawdown cycles (Shages, 2014). In retrospect, the design has not matched actual use, and this has led to degradation of the SPR and impacted its ability to perform its function.

The SPR stores crude oil (either sweet or sour) in 62 underground salt caverns located at four different sites in Texas and Louisiana. The official storage capacity is 727 million barrels, based on sonic measurements. A 2010 study concluded there was a significant mismatch in design and use of the storage caverns. Instead of the initial estimated five large drawdown cycles, a large number of small drawdowns occurred over the previous 20 years. From 1996 through 2014, there were 14 instances of oil removals less than 10 million barrels. These multiple drawdowns have caused cavern deformation, salt falls and other damage to the cavern integrity. In addition, these underground salt caverns are shrinking due to tectonic stresses. The cavern shrinkage (aka closure) is estimated to be approximately two million barrels per year – but may be significantly higher.

More commentary:

Sorry for stopping abruptly, but done for today (ex some possible small additions before 8:00 AM EDT). See you tomorrow!

______

1From Business Insider:

President Vladimir Putin once said he would feel legitimate in using nuclear weapons if Russia was attacked, saying: “Why do we need such a world if there is no Russia there?”

Putin made the remarks in a feature-length interview with the pro-Kremlin journalist Vladimir Solovyov, which was aired on the state-run Russia-1 network in March 2018.

2 Again, raising considerations of morality may seen silly when the US and Israel triggered this crisis by launching an unjustified, illegal war. However, information war has become important, demonstrated by how Iran has built sympathy in global audiences via effective retorts by its officials and embassies to US nonsense on Twitter to Lego videos. At least Professor Marandi and I assume other important Iranians have stressed how Iran is a moral actor. Marandi makes that point explicitly in this talk with Max Blumenthal at roughly 56:00, of Iran having a moral duty to continue the Resistance.

But Iran is up against great power considerations along with moral aims. As the great philosopher, Jamie Lannister, said:

So many vows…they make you swear and swear. Defend the king. Obey the king. Keep his secrets. Do his bidding. Your life for his. But obey your father. Love your sister. Protect the innocent. Defend the weak. Respect the gods. Obey the laws. It’s too much. No matter what you do, you’re forsaking one vow or the other.

3 Yes, Iran has a lot of unsold oil sitting on tankers at sea. From Bloomberg on July 2 in Iran’s Floating Oil Hoard Swells as Major Buyers Stay Away:

More than 20 million barrels of Iranian crude have been idling in Asian waters for at least seven days, up nearly 18% from a week earlier, according to Kpler Ltd. Estimates for the overall volume of the country’s oil on water — either in transit or stationary — have ranged from 58 million to 68 million barrels since the US sanctions waiver kicked in last week, according to data from Vortexa and Bloomberg calculations….

More than 90% of these cargoes on water have no clear destination. The vessels are either indicating “for orders” or Singapore as their next port of call, a sign they may conduct ship-to-ship transfers in the Malacca Strait.

Demand from Chinese independent refiners — Iran’s main customers prior to the conflict — has been muted as the sector’s run rates crash to a nine-year low. China’s state-owned refiners have also stayed on the sidelines, citing concerns over the ability of banks to finance any deals.

And consider:

Print Friendly, PDF & Email

Subscribe to Post Comments
One comment

  1. The Rev Kev

    ‘The Financial Times has estimated that the turnout will be 12 to 15 million. If it exceeds 15 million, that would top the largest funeral gathering to date, that for Indian leader C. N. Annadurai in 1969.’

    The Iranian turnout is more serious. Back in 1969 the population of India was about 545 million people so having 15 million people show up for a funeral was very doable back then. If Iran has 15 million people turn out for that funeral out of 90 million, that is about 1 in every 6 people turning out. The equivalent for the US would be to have about 55 million people turn out for a funeral. The guy had a following as their religious leader.

    Reply ↓

Leave a Reply

Your email address will not be published. Required fields are marked *