Even the remote likelihood of a war at the scale that the US threatens Iran with, is usually a catalyst that fuels oil prices to climb.
It did happen, but the reaction was short-lived and quickly fizzled.
Oil prices jumped by about $1 per barrel on Monday following the back-and-forth war of words between US President Trump and Iran’s president Hassan Rouhani but ultimately pulled back to end the day roughly flat.
Here are some reasons why.
Investors not fooled
Consulting recent memory, North Korean President Kim Jong-un was America’s top bandit and the number one enemy of Trump, with Fire and Fury threats and Rocket Man tweets that many thought would lead to World War 3.
Until the two met June 12, that is, when they became best friends.
Trump has frequently described himself as heavy-handed on Russia, saying in April, “probably nobody’s been tougher on Russia than Donald Trump,” in reference to tough sanctions his administration imposed on the European country.
Now Trump is seen cajoling Russian President Vladimir Putin, even as the US president faces increased pressure over alleged collusion in the recent presidential elections.
Over the weekend, Rouhani said, “Iran’s power is deterrent and we have no fight or war with anybody, but the enemies must understand well that war with Iran is the mother of all wars.”
To which Trump responded by saying in CAPS: NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS!
“I think the market’s a little complacent,” Bob McNally, founder and president of energy consultancy The Rapidan Group told CNBC.
“Maybe they’re thinking this is a repeat of North Korea. The president will tweet about fire and fury and before you know it, the president and President Rouhani will be in Geneva having a meeting and talking about a deal.”
Oil oversupply fears
CNBC reported that oil prices extended losses on Tuesday as Brent crude oil was down 10 cents, or 0.14 percent, at $72.96 a barrel. It said attention shifted to the risk of oversupply, with market participants shrugging off escalating tensions between the United States and Iran.
Saudi is ramping up oil output with Russia by 1 million bpd and said it has 2 million bpd in reserves, if need be, to offset losses that are likely to come as a November deadline approaches for other countries to comply with U.S. sanctions on crude sales from Iran.
By November, the United States expects most oil buyers to reduce purchases of Iranian crude to zero or face U.S. sanctions.
“The market has also been dented by concerns about the impact on global economic growth and energy demand of escalating disputes over global trade,” said CNBC, referring to the escalating trade war between the US and China with $500bn of additional tariffs threatened.
Reuters said Saudi In June pumped the most oil in three years, increasing normal 10 million production by 500,000 bpd.
It could get worse
The threat of military conflict is also threatening to shut the world’s busiest seaway for oil exports and send crude prices higher, analysts told CNBC on Monday.
“This weekend, Iran renewed its threats to shut the Strait of Hormuz, the world’s most important seaborne passageway for crude oil shipments,” said CNBC.
Rouhani mentioned the strait in his speech on Sunday.
Rouhani said: “Mr. Trump! We are the people of dignity and guarantor of security of the waterway of the region throughout the history. Don’t play with the lion’s tail; you will regret it.”
Photo courtesy of CNBC
To be sure, the U.S. military and its Gulf allies would be able to reopen the strait in a matter of days, according to Admiral James Stavridis, former Supreme Allied Commander at NATO, telling CNBC.
“However, Iran could repeatedly shut the strait on a temporary basis by mining its waters and using other surreptitious methods.”
Iran’s exports 2.5 million barrels per day there, but 19 million bpd is shipped to the rest of the world there or about 30% of seaborne-trade.”
John Kilduff, founding partner at energy hedge fund Again Capital, said Brent crude — the international benchmark for oil prices — is on a path to $90 a barrel because the Trump administration is unlikely to issue many sanctions waivers.
However, if Iran opts for the “nuclear option” of shutting down the Strait of Hormuz, Brent could pop to several hundred dollars a barrel, in Kilduff’s view.
Oil gained more than 20 percent in the first half of 2018, and odds have been rising that higher crude oil prices will spark the next economic downturn.