Another day, another round of geopolitical turbulence in the Middle East, with potentially profound implications for global commodity markets – even if they haven’t realised it yet.
Yesterday morning, three American soldiers were killed in Jordan following a drone attack on a US military base near the Syrian border. Washington is unambiguous in its assessment that the culprit for the attack is an Iran-backed militia. A Pentagon official said in response to the attacks: “we know that Iran is behind it. And certainly, as we’ve said before – Iran continues to arm and equip these groups to launch these attacks, and we will certainly hold them responsible.”
There is considerable political pressure on the Biden administration to respond by striking Iranian assets in Syria, Iraq, or even in Iran itself. The latter would represent a serious escalation in regional tensions and bring the US and Iran on the brink of direct conflict. Writing on X, Republican Senator John Cornyn said “Target Tehran.” His colleague Lindsey Graham similarly urged Biden to “hit Iran now. Hit them hard.”
It remains to be seen exactly how the US will respond, but initial reports suggest that Biden is leaning towards attacking Iran directly. Politico reported this morning that “Biden is considering retaliatory strikes against Iran, including large-scale attacks on Iranian and proxy targets in Syria and Iraq, as well as targeting Iranian naval assets.” In other words, tensions in the Middle East could be about to be ratcheted up even higher.
This could have serious ramifications on commodity markets, particularly oil. One potential response from Iran could be to make the Strait of Hormuz unviable for commercial shipping. This stretch of water, which is located between Oman and Iran, is widely considered to be the world’s most important oil chokepoint. In 2018, an average of 21 million barrels of oil a day went through the Strait. This is equivalent to over 20% of global oil consumption.
Leading members of OPEC and some of the world’s largest oil exports, including Saudi Arabia, Kuwait, Iraq, and Iran itself, depend on the Strait of Hormuz for most of their crude oil exports. Particularly given what is already going on in the Red Sea, which has become unviable for commercial shipping because of the ongoing conflict between the US and Houthis, a closure of the Strait of Hormuz would be likely to lead to severe shortages of oil and potentially even energy shortages.
Are oil markets responding to this? Not really. In early morning London trading today, the oil price actually fell slightly. The current price of $82.52 is some way off the peaks we saw in June 2022 following the sanctions on Russian oil – even though the risks to oil supply today are undoubtedly much higher.
What is even more bizarre about the markets’ response to the situation is that restrictions on supply are coming from multiple directions. Just today, the world’s largest oil company, Aramco, dropped plans to boost its capacity to 13 million barrels a day by 2027 in what is a clear sign that Riyadh intends to limit its oil production to try and keep prices higher. A few weeks ago, OPEC also confirmed that it will be cutting production by over two million barrels a day. So why are prices not going up?
One explanation is that the markets are now dominated by traders that are completely oblivious to real-world conditions. As economist Philip Pilkington previously told Disruption Banking, the strange behaviour of markets “has led some to speculate that algorithmic trading and hedge fund short-selling may now be dominating the market.” However, he added that “at a certain point the underlying realities of physical supply will become too obvious to ignore. The price will whipsaw, creating disruptions to the economy.”
Commodity markets are still not responding to what the US Secretary of State Anthony Blinken has called the “most dangerous” conditions for at least four decades. As hedge fund manager Eric Nuttall from Ninepoint Partners said recently: “there is no geopolitical risk premium embedded [in the oil price].” But as tensions continue to rise in the most important region in the world for oil exports, markets can only ignore physical reality for so long.
Author: Harry Clynch
#Oil #Commodities #Iran #MiddleEast #Geopolitics #RiskPremium
