Iran: Sanctions Not War, But How Long For?

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Iran Shoots Down US Spy Drone

Tensions between the US and Iran have reached fever pitch recently following confirmation that Iran shot down a US spy drone last week. Iran stated that the drone had been shot-down due to flying through Iranian airspace. However, the US military has reportedly claimed that the drone had, in fact, been flying through international waters in the Strait of Hormuz. This attack comes just weeks after the US also accused Iran of attacking Saudi oil tankers in the area. This resulted in the US deploying warships and troops to the region.

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Tehran Pushes Back

Commenting on the event, the Iranian Revolutionary Guard Commander Hossein Salami said:

“The downing of the American drone was a clear message to America … our borders are Iran’s red line and we will react strongly against any aggression … Iran is not seeking war with any country, but we are fully prepared to defend Iran,”

US Retaliation Could Escalate Conflict

The world is now watching to see how Iran deals with the fresh sanctions applied by the US on Monday. Over the weekend, Trump tweeted

To War, Or Not to War

As the confrontation with Iran continues to escalate, the possibility of military intervention increases. This is especially true since diplomacy seems to have turned sourer than ever. With the odds of war rising, Congress worries that Trump will declare war without their approval. However, they have firmly stated that they will not issue any federal funds should that be the case.

Should war occur, Trump would be opposing his position against “endless wars”, one of his main policy points winning him the 2016 elections. That is going to put the next election at stake, and when considering he was the one pulling out of the nuclear agreement, he may be setting himself up for a humiliating presidential defeat.

Given the political rather than national interest Trump would be wise not to go to war. But with more sanctions on Iran and knowing Bolton, his war-hawkish national security advisor, the likelihood of a military confrontation is still very much prevalent.

Middle East Tension & Trade War Optimism Boosting Oil

While market participants attempt to decipher the leaders’ next moves, tensions are supporting oil prices which have rocketed higher in recent days.  Tensions in the Middle East typically translate into higher oil prices as traders anticipate supply disruptions. Furthermore,  Trump is due to meet Chinese premier Xi Jinping at the G20 summit in Japan later this week. So, traders are also hopeful for a resolution to the ongoing trade war, which is again currently supporting higher oil prices.

How Could Oil Be Impacted by A War with Iran?

The prospect of a fresh conflict in the Middle East could provide the catalyst for a major price movement in oil markets. While the scale of the moves might not be on the same magnitude as we saw at the start of the Iraq war, which sent prices higher by over $100, we could still see significant upside. Iran is a major oil producer, supplying more than a fifth of the world’s oil.

However, due to US sanctions applied earlier in the year, the market has been without a large percentage of Iranian oil. Therefore, the impact might be absorbed. At the very least, we would likely see oil trade back up through the 76.88 2018 highs.

How Might the US & OPEC React?

Such a move would likely be countered with further increases in US crude production to try and bring prices down. Over the last year, US crude producers have been ramping up production to fresh record highs in a bid to counter higher prices from OPEC cuts. Similarly, if oil prices trade too far to the upside, we could once again see OPEC stepping up production across the board in order to try and create equilibrium in the market.

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