Not long ago, a rise in tensions in the Middle East would send oil prices swiftly higher, even if no oil supply disruption occurred. Recently, tanker incidents have provided little spark to prices and have actually provided shorting opportunities.
Many articles written about Iran and Mid-East tensions have been repetitious accounts about the Strait of Hormuz, how 20 percent of the world’s oil supply flows through it every day, how it is only 21 miles wide at its narrowest, and how Iran has threatened to close it in revenge for the crippling sanctions on its exports and economic warfare.
What they failed to do is to give a complete picture of reality as it exists in 2019. There are numerous factors that argue that a war with Iran is unlikely and that its effect on the world oil market would be muted if hostilities break out.
Iran doesn’t want war.
Late last week, the head of the Defense Intelligence Agency, Army Lt. Gen. Robert Ashley, concluded that Iran does not want to start a war with the U.S. or its allies. “The outcome would be very horrific for all,” he said.
And some of Iran’s hardliners suggest that both sides should talk. A New York Times story dated July 19th reported that former Iranian President Mahmoud Ahmadinejad told the NYT in an interview:
Mr. Trump is a man of action. He is a businessman and therefore he is capable of calculating cost-benefits and making a decision. We say to him, let’s calculate the long-term cost-benefit of our two nations and not be shortsighted.”
World peace, economy and culture would greatly benefit from us working together. The U.S. wants to address wider issues than the J.C.P.O.A. The issues at stake are more important and wider than whether the J.C.P.O.A. should live or die. We need to have a fundamental discussion.”
Source: CreditAbedin Taherkenareh/European Pressphoto Agency.
The NYT also reported:
Iran’s foreign minister said on Thursday that he was willing to meet with American senators to discuss possible ways out of the nuclear crisis with the Trump administration and, for the first time, floated an opening bid of modest steps that Tehran would be willing to take in return for simultaneous lifting of sanctions President Trump reimposed last year.”
President Trump doesn’t want the U.S. to get entangled in another Middle East war.
Throughout the 2016 campaign, Trump lambasted supporters of the Iraq war. “Great nations do not fight endless wars,” Trump said in the annual State of the Union address in 2019 to Congress. Following the shooting down of the American drone over the Strait of Hormuz in June, Trump nixed any armed counterattack.
Instead, he favors economic warfare in the form of sanctions. Treasury Secretary Mnuchin has effectively become his “Secretary of War,” a cabinet position that was established in 1789 and abolished in 1949.
If Iran were to block the Strait of Hormuz, “it’s not going to be closed for long.”
President Trump also said,“They’re not going to be closing [the strait]. They know it, and they’ve been told in very strong terms. “
How can he back up this tough talk? The U.S. Fifth Fleet patrols about 2.5 million square miles of water area and includes the Arabian Gulf, Gulf of Oman, Gulf of Aden, Red Sea, and the Arabian Sea.
The Fifth Fleet’s area of responsibility includes several key chokepoints in the Middle East.
Source: US Navy.
U.S. Naval Forces in the 5th Fleet:
The 5th Fleet is currently deployed in the Persian Gulf, and as of Feb. 23, the naval forces included: two carriers, 20 ships, 103 strike aircraft, approximately 20,000 sailors and marines.
The military sealift command forces in the gulf include: 18 ships, 189 U.S. Navy personnel, 844 civilian mariners and 64 oceanographers. Naval forces enroute to the 5th Fleet include: five ships, 30 aircraft, 4,740 sailors and marines.
Source: The Washington Post.
IEA emergency stocks.
The International Energy Agency announced on July 22nd:
Consumers can be reassured that the oil market is currently well supplied, with oil production exceeding demand in the first half of 2019, pushing up global stocks by 900,000 barrels per day. OECD commercial stocks now total more than 2.9 billion barrels, which is higher than the five-year average.
IEA countries hold 1.55 billion barrels of public emergency oil stocks. In addition, 650 million barrels are held by industry under government obligations, and can be released as needed. These IEA emergency stocks are large enough to cover any disruptions in oil supply from the Strait of Hormuz for an extended period.
EA Executive Director Dr Fatih Birol is in close dialogue with ministerial counterparts in IEA member and associate governments as well as in other major consuming and producing nations. As usual, the IEA is ready to act quickly and decisively in the event of a disruption to ensure that global markets remain adequately supplied.”
The U.S. Strategic Petroleum Reserve has about 650 million barrels, as part of the IEA total. Its maximum nominal drawdown capability is 4.4 million barrels per day and the time for oil to enter U.S. market is “13 days from Presidential decision”
Source: U.S. Department of Energy.
“Voluntary Production Restraint”
The U.S. Energy Information Administration defines it as “the amount OPEC members withhold from supply due to their efforts to help support prices.” This is the amount of supply which can be brought back into the market.
EIA estimates that 1.93 million barrels per day were withheld from the market by OPEC as of June 2019. Most of this additional capacity is controlled by Saudi Aramco (ARMCO). Khalid Al-Falih is the Aramco chairman, and he has promised Aramco will do its best to keep the market well-supplied. The Saudis as depend on the U.S. for its defense from Iran.
This supply does not include “loss of production capacity” or “unplanned outages.” Those are defined as supply losses that “include, but are not limited to, sanctions, armed conflicts, political disputes, labor actions, natural disasters, and unplanned maintenance. Unplanned outages can be short-lived or last for a number of years, but as long as the production capacity is not lost, EIA tracks these disruptions as outages rather than lost capacity.
Saudi Aramco increased its export capacity on its West Coast.
Last year, Aramco announced that it had added 3 million barrels per day of oil export capacity to its West Coast on the Red Sea after the upgrade of Saudi Aramco’s Yanbu South Terminal.
Aramco also announced plans to overhauled the Muajjiz oil terminal on the Red Sea, which would increase the total Saudi loading and export capacity to 15 million barrels per day. The terminal has three berths, each with a maximum loading capacity of 135,000 barrels an hour.
The market is not spooked by the prospect of a closure of the Strait of Hormuz, or by the effect on world supplies, if it were closed by Iran. Such a closure would not last long, and emergency supplies are available quickly and in large volumes. “These IEA emergency stocks are large enough to cover any disruptions in oil supply from the Strait of Hormuz for an extended period,” according to the IEA.
Rather, oil traders and astute investors should consider market blips due to incidents in the Middle East as shorting opportunities.
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