Iran and the Battle for the World's Most Important Crude Transit Lane
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Iran and the Battle for the World’s Most Important Crude Transit Lane

by | published July 6th, 2018

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For concrete proof that geopolitics are the most important factor in determining global energy prices, one only needs to see where I am now.

I’m writing to you from Lausanne, Switzerland on Lake Geneva.


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Lausanne and Lake Geneva (called Lac Leman by the French-speaking locals) beyond; Photo: Soeur Goold

I have been called to this picturesque site for meetings on the impending renewal of U.S. sanctions against Iran.

Now, I will have more to say about the importance of what is transpiring here upon my return to the states next week.

However, something happened during the middle of yesterday’s heated discussions that simply cannot wait…

Fear & Loathing in Teheran

Yesterday, Teheran lobbed a potential hand grenade.

With clear support from the Iranian Revolutionary Guard (IRG), the former moderate Iranian President Hassan Rouhani warned that oil shipments through the Strait of Hormuz could be disrupted, should Washington make good on its promise to renew sanctions on November 4.

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Iran has made the threat before.

However, this time, Rouhani received an almost immediate statement of strong support from IRG Major General Qassem Soleimani who announced that the IRG is prepared to move immediately on any presidential decree to close the waterway.

Soleimani is the commander of the elite IRG Quds Force and the most respected military leader in the region.

He designed and directed the strategy that primarily restored Iraqi territory from the control of ISIS.

The Strait of Hormuz is a connection between the Persian Gulf to the northwest and the Sea of Arabia to the southeast.

Iran borders the strait on one coast; the United Arab Emirates (UAE) and Oman on the other.

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Strait of Hormuz with the Iranian Bandar Abbas region to the north and the Omani Musandam Peninsula to the south; Photo: Al Arabiya

At its narrowest point, the strait is less than 35 miles wide, but half of that is in Iranian waters and thereby out of bounds for tankers.

Much less of the remaining width is actually navigable.

The IRG Navy can interdict sea traffic at the strait but probably cannot stop traffic altogether.

Nonetheless, any introduction of uncertainty caused by the possible interruption of crude oil transfers will spike volatility and raise global oil price dramatically.

In response, the U.S. has said it is prepared to respond militarily to prevent the strait from being closed.

But the bottom line is this…the Hormuz gauntlet has been thrown (yet again).

And we all enter a dangerous game of chicken…

[Warning]: “All is not right in our once-great nation.”

Stuck Between a (Shale) Rock and a Hard Place

The fluidity about this latest crisis was emphasized yesterday, subsequent to Rouhani’s statement.

Hashmatullah Flahat Bisha, the chair of the Iranian Majlis (Parliament) Committee for National Security and Foreign Policy said that Iran couldn’t close the strait.

But it is uncertain whether he was referring to Iran’s military ability to keep Hormuz closed or the advisability of doing so at all.

Around 17 million barrels, or about 22% of all the world’s daily oil transit, takes place via Hormuz.

If we consider only oil moved by tankers (i.e., subtracting what is moved by pipeline), it increases to almost 36% of global oil trade.

In the ongoing competition in the Persian Gulf, Saudi Arabia, Bahrain, the UAE, Qatar, Iraq, and Kuwait oil and liquefied natural gas (LNG) exports would be directly affected by any attempt to prevent transport via Hormuz.

Iran would affect its own exports as well since the bulk of that volume ships from terminals on Kharq Island in the northern Persian Gulf, although Iran it is about to operationalize some port facilities south of the strait.

The initial market reaction has been to discount the likelihood that the Hormuz closure will be realized.

After all, the Iranians made a similar threat several years ago when the U.S. set in motion its earlier sanctions against Iranian oil exports, and no closure ever took place.

On the other hand, I have experienced a firm resolve from the Iranians this time around.

That and a quiet determination to make the U.S. pay for pulling out of JCPOA (Joint Comprehensive Plan of Action).

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A Mexican Standoff in Vienna

After his announcement that the U.S. would no longer abide by the treaty, Trump also declared that sanctions would resume on November 4.

In addition to barriers against Iranian oil exports, moves to penalize foreign companies, banks, insurers, and shippers doing business with Iran would also be enforced.

Such secondary sanctions have resulted in a firestorm of criticism and opposition from America’s European allies.

JCPOA retains the support of all the other signatories – Germany, France, the UK, the EU, Russia, and China.

As I have noted in previous editions of Oil & Energy Investor, there is pushback from the others intent on saving JCPOA despite Washington’s decisions.

An earlier meeting in Sofia, Bulgaria pledged European central bank support for developing a payment regime to overcome U.S. sanctions.

The next stage takes place later today (July 6).

Foreign ministers from Berlin, Paris, London, Moscow, and Beijing are meeting with Iranian officials in Vienna to design a path toward keeping JCPOA.

This will be difficult, given the absence of the U.S. in any further negotiations on the treaty. But the attempt is underway nevertheless.

Here in Switzerland, I will receive a detailed analysis of both the outcomes and the tenor of those meetings from staff directly involved.

Rest assured, I will be reporting to you what transpires right here in Oil & Energy Investor.

So make sure to stay tuned.

Sincerely,


Kent

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