Last year, we reported that the Biden administration has been increasingly cozying up to Iran as the U.S. and its allies hoped to strike a new nuclear deal with Tehran after the Trump administration scuttled the Joint Comprehensive Plan of Action (JCPOA) deal of 2015. Following the imposition of severe sanctions by Washington, Iranian oil production tumbled from 3.8 million barrels per day in early 2018 to less than 2 mb/d in late 2020; however, production has surged under Biden to 3.2 mb/d.
Since the start of the current escalation in the Middle East, experts have debated whether the status quo with Iran is going to be maintained or the West will attempt to roll the clock back to early 2022 or even to late 2020. The latest attacks on U.S. troops in the region have all but removed those doubts.
On Monday, news emerged that three U.S. service members were killed in Jordan, while more than 40 other soldiers were injured following a drone attack on a U.S. military base near the Syrian border. U.S. forces are suspected to have mistaken the enemy drone for an American one and let it pass through unchallenged.
The U.S. and its European allies have wasted no time condemning Iran for the attack and are mulling boosting sanctions on the country due to Tehran's unabashed support for militant groups in the region, particularly its support for Houthi forces. U.S. Secretary of State Antony Blinken has revealed that the West’s response to the attack will be “multi-levelled, come in stages, and be sustained over time”.
"Following the threats posed by the Islamic Republic in the region, especially its support for the Houthis and proxy groups in Iraq in recent months, which led to the formation of an international coalition in the Red Sea, recently, the United States and some Western countries have initiated discussions to intensify sanctions against Iran,” a diplomatic source told Iran International. Related: Lackluster Economic Data Out of China Puts Oil Prices Under Pressure
As commodity analysts at Standard Chartered have observed, the markets only issued a muted response to the attacks with oil prices pulling back after the initial spike. StanChart has speculated that the market is assuming the U.S. will only issue a single layer of response over a short period that will be limited to Iraq and Syria, but is not pricing in a response that could be extended over time.
StanChart says that, following the attack, there’s a big probability of a significant change in the policy dynamic between the U.S. and Iran, and in particular Iran’s surging oil production is likely to be in the crosshairs.
The Biden administration is likely to be further motivated to take stern action on Iran due to the country’s continued violation of the terms of the JCPOA agreement. Iran has not only lifted the cap on its stockpile of uranium to 18 times the level permitted by JCPOA but has also increased its enrichment activities to 60%, far above the 3.67% permitted level. A year ago, the International Atomic Energy Agency (IAEA) reported the discovery of particles of uranium enriched to 83.7%.
The U.S. as well as allies the UK, France and Germany (commonly referred to as the E3) have pointed out there’s no credible civilian justification for Iran’s nuclear programme. Last September, E3 reported they are “committed to preventing Iran from developing nuclear weapons, including through the snapback process if necessary”.
Market Weakness Not Justified By Fundamentals
Previously, StanChart has argued that the weak oil price action is not justified by oil fundamentals, which remain strong. The commodity analysts have pointed out that the bearish sentiment is mainly being driven by the notion that demand growth has failed to meet Wall Street’s expectations, a notion it has dispelled using actual data. Last year, oil demand at the end of the year surpassed January 2023 forecasts; forecast for the current year by the EIA estimate is 881kb/d higher, the IEA estimate is 380 kb/d higher while StanChart’s is 819 kb/d higher.
Standard Chartered has reiterated its earlier position that oil markets are heavily discounting geopolitical risks due to a lack of clear understanding about seasonality. In StanChart’s view, the current oversupply in January is primarily due to seasonality but has predicted the markets will gradually tighten as the months roll on–again, due to seasonality.
According to the experts, the current global crude inventory build of 1.17 mb/d will flip to a draw of 1.40 mb/d in February, with the inventory draw widening to 1.48 mb/d in March, thanks in large part to seasonal demand recovery. StanChart says the expected inventory draws, coupled with the seasonal upswing in demand, could potentially trigger a significant oil price rally.
By Alex Kimani for Oilprice.com
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Moreover, Iran has no intention of reaching a new nuclear deal with the United States as the Biden administration has been hoping unless it is on its own terms meaning a lifting of all sanctions against it, no new restrictions on its nuclear programme and its ballistic missile development and a removal of the designation of the Islamic Revolutionary Guard Corps (IRGC) as a terrorist organization. This is something no US administration can accept.
With its success in evading US sanctions, Iran is tempted to focus its efforts on its ultimate objectives of ejecting US forces from Iraq and Syria by supporting the Iraqi Mobilization group and its allies in Syria with weapons and training to continue their attacks on US bases and military personnel in both countries.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert