The Hawks are Circling

The Hawks are circling, and should world turn nervous?

Admittedly I’m feeling a tad naïve this morning for not picking stronger signals from both Pompeo and Bolton with regards to Iran policy. This even though I thought a large part of the Trump election 2020 strategy would not only see the President appeal to his electorate base but of course present to the media a  new villain since China will probably no longer fit the bill after a watered-down USMCA-style trade deal is signed. Well, it appears that the new villain is neither new nor surprising and was under our nose all the time.

The Trump administrations not so invisible hand, especially when it comes to economic matters, was back at it again today as the administration decided not to extend waivers on Iranian oil.

Oil prices reaction or overreaction

The prompt contracts quickly repriced higher on panic fears that markets could face an immediate supply crunch adding more pressure to the already tenuous global supply squeeze and suggesting that $80 Brent per barrel under these conditions, something we thought unlikely only days ago should now be considered a possibility. Sure  Saudi Arabia and the UAE are reportedly expected to ramp up production to fill the Iranian production gap.

However, it leaves global supplies in an even more delicate position as it will then bring into question OPEC+ elasticity and spare capacity concerns to respond to future supply shocks especially with the possibility of a catastrophic supply shock from Libya still in the fore.

Is there more than meets the eye?

I’m sure there’s more to this than meets the eye on the production side in addition to Saudi + to fill the Iran void. Its highly unlikely Trump twist the economic screws on Iran without having some supply backing as his electorate base will not be happy with +$ 3/gallon gas this summer, and that’s where prices are headed unless more supplies come to market.

Shale oil response?

But not is all bad for US drivers as Shale producers are producing at a level more abundant than ever before, but the big question is how much more can the Shale industry squeeze out at WTI $65 per barrel given the current production bottleneck?

Not all crude is created equal

However, that leads us to the issue that “not all crude is created debate equally” as in the absence of a flourishing supply of heavy crude, the sludge US Gulf refineries are built to process, its expected pressure on gasoline prices will mount regardless of shale producers’ ambitions.

Iran retaliation options

Beyond an unlikely military response which  Iran’s hard-line faction has no money to support, Tehran has threatened to stop the flow of seaborne oil exports from the Middle East by blockading the Strait of Hormuz, a 21-mile-wide strategic bottle choke point in the Arab Gulf.

Should Iran close, the Strait of Hormuz industry studies suggests, it would mean more than 18 million bpd of crude would stop flowing from the Middle East and tighten prices further.

Gold Markets

I would not confuse short covering bounce on gold with haven demand. The market is not too bent out of shape about the fact the US will not grant new waivers and what little haven demand hit the markets soon quickly evaporated as risk sentiment remained on an even keel as US equity future barely budged and the Yen saw no buying demand.