(WCTW) The New Oil Order
With the Strait of Hormuz under its control, Iran becomes the world’s most powerful oil producer.
Total capitulation, that’s probably the best way to describe the MOU signed by the US and Iran today. And no, it’s not the Iranians that capitulated; it was the US.
I won’t go into detail on the geopolitical sections of the MOU like how Lebanon will continue to be a thorn on both the US and Israel’s side or that Iran will receive sanction funds as part of signing the MOU.
Instead, there are only 3 sections pertinent to the oil market analysis for the near term and the long term.
US naval blockade removal
Iran will make its “best efforts“ for the safe passage of commercial vessels, with no charge for “60 days only.”
Iran will also consult with Oman and other Persian Gulf states to determine the future management of the Strait of Hormuz.
Now, assuming hostilities don’t return and that the US and Iran both reach a permanent resolution under the MOU, this is what will happen to the oil market.
In a nutshell, Iran is now the world’s most powerful oil producer.
All or Nothing
In a WCTW published on June 2 titled, “It’s All Or Nothing For The Oil Market.” I wrote the following:
In my view, the oil market is going through a structural shift. The first question we need to answer is, who controls the Strait of Hormuz?
Once we know the answer to that, we can assess the long-term attractiveness of oil producers.
If Iran controls the Strait of Hormuz, you want to be max long oil producers.
Iran will limit flows.
Iran will be the world’s most powerful oil producer.
Shipping traffic returning to the Strait of Hormuz, even after reopening, will be materially less than pre-conflict.
Geopolitical risk premium will always be embedded in the event that Iran can close the Strait of Hormuz at a moment’s notice.
Oil prices will need to stay structurally higher to incentivize supply increases elsewhere. In such a scenario, we could argue that Brent would remain above $ 100/bbl for years to come.
What’s troubling about this scenario is that non-OPEC supply growth was already materially decelerating with US shale on its last leg. Even in the event of elevated oil prices for longer, we estimate that US crude oil production can only maintain 14.5 million b/d, up 0.8 million b/d. That’s a fraction of the supply needed to replace the potential supply throttling if Iran controls the Strait of Hormuz.
From the start, this was the first geopolitical event I’ve witnessed that was all-or-nothing. Either the US achieves regime change in Iran, or Iran ends up controlling the Strait of Hormuz. The logic was that if the US capitulated, Iran would become the world’s most powerful oil producer.
Now this MOU effectively acknowledges that Iran will control traffic in the Strait of Hormuz. The fact that the “fees” will only be paused for 60 days is a clear indication of that. In addition, the MOU states that Iran will make “best efforts” in trying to restore traffic. There was no clause stating it would return to pre-war traffic, other than that the blockade would be in proportion to pre-war numbers.
From the Iranian standpoint, controlling traffic flow is a form of leverage they will never relinquish. They understand fully that by controlling the Strait of Hormuz, they can control oil prices, which will be the most powerful economic weapon of all.