What the world really doesn’t need now is much higher oil prices. My hunch has been that oil would trade in a $40 to $60 range. I was wrong about that and oil has fairly consistently traded above $60, in a new $60 to $75 a barrel range. If oil breaks out above $70 and stays above that level, we could see substantial inflationary pressures build just as President Trump decides to rev growth by cutting taxes. This could push up currently subdued inflation rates above 3% just as the US Federal Reserve starts to worry about….you guessed it – inflation.
This could, in fact, be Trump’s great legacy – he got growth rates above recent long-term trends but only because he pushed up inflation rates, which might then prompt a central bank overreaction which tumbles the US into a slowdown. Oddly enough Trump’s policy on Iran may just help achieve this problematic outcome.
I’m absolutely no fan of the Iranian regime and its export of terror and Shia extremism but I think once you do a deal with someone (including your enemies) you stick to it. Also if the US keeps poking the Iranian bear sooner or later its extreme clerical elements will strike back, pushing the US and Iran into a dangerous confrontation. Talk to most sci-fi writers for instance and you’ll find a consistent futurist idea that the next big global war won’t be with Russia but with Iran – with disastrous consequences as the great superpower is sucked into a war with a population that was -clerics and Revolutionary Guards aside – probably the most pro-US in the region. Ordinary Iranians are sick and tired of their turbaned autocrats but if the US attacks them they’ll rally to the nationalist cause.
It also strikes this observer that there are better ways of defending Israel and guaranteeing its long security than bombing a series of mysterious science complexes that may or may be making bombs to hurl at Israel. So, all in all, I don’t have a great deal of sympathy for trying to badger the Iranians over their deal, although I recognise it possibly does deserve some ‘revisiting’ to tighten up on the export of terror.
Unfortunately recent cabinet-level appointments – especially of Bolton and Pompeo – indicates that we are about to see a ratcheting up of tension with Iran. That could have a dramatic impact on oil markets, pushing oil prices through the roof at exactly the wrong moment.
Or will it? A paper from last week by SocGen’s Michael Wittner and Mark Kogel suggests that I may be too pessimistic. They remind us that the next extension of oil sanctions waivers on Iran, as required under the multilateral nuclear deal (JCPOA), is due on 12 May. The French investment bank has just increased the chances of sanctions coming back into effect to 70% from 50%. Crucially the two commodity strategists still “assume the crude price impact at $10, unchanged from our estimate on 8 March; however, we now estimate that $5 (half of the impact) has already been priced in…we believe this has been a bullish factor in the oil markets in the last couple of weeks.2 The strategists expect Trump to try to implement the sanctions more quickly, although this might still take 2-3 months but in terms of oil supply the base case scenario is for these new sanctions to “remove only 0.5 Mb/d of Iranian crude from the market”, largely because the EU will probably not sanction (though imports may decline). The Saudi’s can also be relied on to increase output if oil ticks much above $80 – the SG strategists suggest that the kingdom is probably happy with oil prices above $70 but if they strayed too much above this level “ the Saudis would start to increase output and exports to make up for the disruption and to meet the needs of their customers”.
I have to say that I’m a little more pessimistic about the possible outcomes. I can’t see the clerics and Guards in Iran reacting with anything other than aggression to a decision to re-impose sanctions. They’d presumably start working again on a bomb and we’d se a ratcheting up of tensions across the region. I’d also guess that they’d be more than willing to use their proxies to inflict pain on the US – in Syria, in Iraq and beyond. This could goad the Trump administration into even more aggressive military threats which I don’t think they’ll be able to implement. In sum, I’m not sure what sticks the Americans have left to beat the Iranians with – unless you are really willing to go to war to stop them developing a nuclear weapon. Which, it goes without saying, would be utterly disastrous.