Politically and fundamentally, we are now in the final innings of this “fork in the road” in the Iran war.
Politically: Midterm elections are 3 months away with the most impact being felt on the voter base in August and September. It’s now or never to make a deal.
Fundamentally: Bab al-Mandeb has reduced Saudi crude export flows by 1.5 million b/d. Global oil market balance in the last 2 weeks declined by 6.3 million b/d, according to Goldman. If the Oman lane is contested again or if Fujairah is targeted, the deficit increases to 12 million b/d. With less than 100 million bbls left in OECD commercial crude inventories, this would imply an operational minimum within a month. It’s now or never.
The timing of the TACO from Trump has always coincided with the oil math. We saw the first TACO in early April, with the oil market’s breaking point in mid-April. That was the best time to resolve the conflict and give the Iranians control of the Strait of Hormuz. But as my WCTW report explained yesterday, even if we did, they would’ve exerted leverage, demanded more and drained our strategic petroleum reserve either way.
The next big one was the June MOU where we effectively already gave Iran control of the Strait. But the “different interpretation” meant that the US wanted to establish the Oman lane, through which 4-6 million b/d of oil flows.
And while 100 million bbls of floating storage and 50 million bbls of loaded crude rushed out, we didn’t see a similar drop in petroleum product prices, because you can’t print molecules.
Now we are here. MOU 2.0 is upon us, supposedly, and we are giving Iran control of the Strait of Hormuz again like MOU 1.0.
What changed?
Nothing.
If the US goes back to the MOU, it will effectively put Lebanon back in the game again, as that was point 1. And since Israel has no intention of pulling out of Lebanon, Iran can just point to that issue and limit the inflow of tankers. Since inflow tankers are what determines how fast oil production shut-in returns, we are basically handing them the keys in exchange for ~23 million bbls of floating storage stuck in the Persian Gulf.
That sounds like a really shitty deal to me.
But more importantly for the Iranians, what’s the endgame here?
They know that maximum leverage needs to be applied now, so is this just a diplomatic gesture to the rest of the world that they “tried” similar to MOU 1.0?
Remember that Iran’s Foreign Minister stated in a recent TV interview that they wanted to exhaust all diplomatic options. That way, in the event of more conflict, the Iranians can say that they tried the diplomatic solution, but the US violated the agreement.
Well, I guess we are about to find out just exactly what they want. In that context, the latest from Sepah News, the official media outlet of the IRGC, was an interesting point:
The main reason for the delay in reaching an agreement with Oman regarding the Strait of Hormuz is the involvement of the United States and the threats from Trump.
As long as there is US interference and threats of military action against Iran, the agreement will be delayed.
Iran will not make any agreement under the shadow of threats.
And while the US tried to signal to the oil market that the Strait of Hormuz will be reopened within hours or tomorrow, the reality is that it’s time for the rubber to meet the road.
You either open it or you don’t.
The Next 48 Hours
Trump said himself, “We will know in the next 48 hours.”
Yes, we will. This is a black-and-white issue. Either the US and Iran agree to a deal and hand Iran effective control of the Strait of Hormuz, or there’s no deal and escalation is back on.
Even if there is a deal, we will need to see how many tankers Iran allows back into the Strait. In addition, we need to know whether it has a say on how many can exit.
The oil market, on the other hand, appears overly excited to price in the news before anything actually materializes. Almost like an invisible hand is trying to guide it somewhere, but interestingly enough, the physical market doesn’t care anymore. Physical demand is strong and time is running out.
We will all know soon enough.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of USO, UCO, BNO either through stock ownership, options, or other derivatives.