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In just over a week, Donald Trump has shifted from touting an imminent peace deal with Iran to adopting a “low key” attitude to negotiations.
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The US President signaled this weekend that he’s prepared to let economic pressure on Iran build rather than launch fresh military strikes. The pivot risks leaving flows through the Strait of Hormuz in a state of limbo.
Millions of barrels are still moving out of the Persian Gulf via the critical oil chokepoint, mostly thanks to a furtive network of shuttle tankers that try to sneak through the waterway undetected.
Still, the weekend brought fresh evidence of how vulnerable the region’s shipping and energy infrastructure remain amid the unresolved conflict.
The United Arab Emirates — which has moved more crude through Hormuz than any other producer over the past two months — said early Saturday that one of its vessels was targeted by a missile, after three were hit last week.
The following day, Saudi Arabia extinguished a blaze at its Jazan refinery on the Red Sea, which the Yemen-based Houthi militant group claimed to have attacked.
Trump has signaled he believes time is on his side, and can let the economic pain of America’s naval blockade on Iran pressure the country into agreeing to a deal.
With crude prices considerably below the highs struck at the outset of the conflict — thanks to a combination of China’s demand adjustment and swelling production across the Americas — Washington does indeed have some breathing space.
But global oil markets nevertheless face growing pressure. World oil inventories are depleting again at a brisk clip after some respite during the US-Iran ceasefire.
The reserve buffers that consumer nations have been using to plug the supply shortfall are also seriously depleted. America’s Strategic Petroleum Reserve is down to its lowest since the 1980s.
That leaves the market vulnerable to sporadic price spikes, like last month’s brief climb to $100 a barrel, even if the far more extreme scenarios contemplated at the outset of the war have receded.
The squeeze is most acute for refined products like diesel, the world’s workhorse fuel that’s currently trading above $160 a barrel in Europe, which is simultaneously being strained by Russia’s war against Ukraine, with attacks on Russian plants severely limiting exports.
Trump may believe he has time to let the pressure on Iran build. With fuel buffers dwindling ahead of winter, the oil market may not afford him as much as he thinks.
—Grant Smith, Bloomberg News
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