US-Iran Deal: It Ain't Over Till the Fat Lady Sings

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A Memorandum of Understanding (MOU) has been signed on Thursday between Iran and the United States, setting the stage for a 60 day negotiation period. As part of the “deal” both sides have to put an end to their blockade of the Strait of Hormuz, allowing ships to sail through unhindered. The price of oil has fallen considerably as a result, and hopes of returning to some sort of normality is higher than ever in the past three months. Is that all there is to it? Ho-ho… No. The hard part is just about to begin—not just vis-a-vis Iran, but for the entire world.

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“Amateurs talk strategy, professionals study logistics”

In the spirit of General Omar Bradley’s famous quote, let’s start with logistics. If everything goes according to plan the strait will be open for the next 60 days—ostensibly with no tolls but still under full Iranian coordination. After that Iran and Oman will likely collect an “Environmental” or “Insurance” fee for each ship passing, generating a steady revenue stream for the two countries. Sounds nice, but what can be realistically expected? Will shippers return in droves then? Will oil start gushing out of the Gulf? Let’s see…

Assuming safe passage can be guaranteed for the 40 tanker ships¹—loaded with some 80 million barrels of crude oil, and headed for Asia—the coming weeks will likely see a significant uptick in oil exports from the region. So far only 25% of the tankers present at the start of the crisis have managed to leave, with or without their transponders, transmitting their exact location, turned on. And while there were rumors about a significant amount of oil being exported in ‘dark mode’ under the guidance of the US Navy, the hundred ships going in and out of the Persian Gulf per month throughout March-May still represented less than 3% of the original pre-war traffic.

Source: Lloyd’s List

Just as a reminder: before the war 120-130 ships used to transit the narrow passageway between the Arabian Peninsula and West Asia daily—that’s more than 60 ships in each direction (east- and westbound) every single day. Those forty vessels, important though they are for global oil supply, are still just a fraction of that volume—not a world changing event on its own. And then comes the logistics of organizing, lining up, getting insurance and paperwork done etc. for a large number of ships—not just the 40 tankers, but a number of bulk carriers, container ships etc as well… If you wondered why news headlines are not full of images with ships leaving in droves, that’s part of the answer.

“There are some 550 merchant ships of above 10,000 dwt that will need to be prepared to exit the Middle East Gulf, including 160 tankers, 200 bulk carriers, 60 container ships and 10 vehicle carriers, but greater clarity is needed before shipowners can begin transiting en masse”—writes an article on Lloyd’s List. This is a formidable traffic jam of ships—and we haven’t even mentioned limitations on how many of these vessels could be safely guided through the partially mined waterway each day; let alone their willingness to do the crossing, as the last time the “Hormuz is open” sign was up the process ended up in chaos. According to some estimates it could thus take 8-10 days for these vessels to leave the area—but it could be much-much more than that… So far only some Iranian vessels made it through, and it’s late June already.

Nobody is rushing to the exit: this is going to be a long process. According to the agreement, the US will begin lifting its blockade within 30 days, and Iran will have a 30-day period for de-mining and removing Iranian military obstacles. The US will also look to terminate primary and secondary sanctions against Iran, unfreeze Iranian assets and issue waivers for Iranian crude oil export—all pending on the success of further discussions. In the meantime the by now 1.1 billion barrel sized hole in world oil supply will keep growing, and growing… Even as inventories are being drawn down at a record pace. Again, how that 80 million barrels of oil could drastically change that picture—when it eventually manages to leave the Persian Gulf—is beyond me to grasp.

Marine growth or biofouling can slow down ships considerably. Source: NATIONAL MARITIME HISTORICAL SOCIETY

But let’s assume these 40 crude carriers do manage to leave the Strait of Hormuz behind… By when, exactly? Late June? Early July? Normally it takes three to four weeks for these ships to reach East Asia—even without the significant amount of marine growth (such as barnacles, mussels, algae, and seaweed accumulating on these ships over the months), taken into account. Realistically speaking, we are unlikely to see any additional drop of oil arriving to Asian ports before August.

And this brings about the next big question: will other ships return in anywhere close to their pre-war numbers? Or to be more precise: how many ship owners will take on the not-so-insignificant risk of entering the area? Of course there are opportunistic shipowners who are pre-emptively positioning their vessels for charterers looking to restock. But others are staying cautious as this crisis has shown that agreements may not necessarily be followed. The risk of being locked up for months (again) or worse—such as losing a ship and thus revenue flow for years—is just way too high for most companies. Tanker rates reflect that reality:

“PetroChina was hoping to lift Basrah crude between June 25 and 30, but high freight rates are complicating the search for vessels. “There are tankers available, but the problem is it’s too expensive and there is no guarantee you can exit the strait,” an executive at PetroChina told Reuters. Moving crude supply out of the Persian Gulf will likely remain complicated in the near term, one of the shipping sources said. “It’ll be ‌still difficult to fix a vessel due to the rate, and I assume that both parties need to agree to some special clause” on conditions to transit the Strait, the source told Reuters. Indian Oil Corporation (IOC), meanwhile, didn’t receive any offers for tankers to load Iraq crude from Basrah early next week, and had to eventually declare force majeure on the cargo, a source with knowledge of the matter told Reuters.”

Most shippers and buyers will likely remain in a wait-and-see mode for the coming weeks or months. They will wait for the first ships to safely leave the area, and when they see some highly adventurous shippers enter than successfully exit the Gulf—as well as mines and other obstacles being removed—only then they will cautiously return. These ships cost a fortune and many years to build, and when there are other—longer but safer—routes to operate on, most will likely choose that option. See, shipping companies do not care if crude inventories in a country run low or not, they care about their crews and investment first and foremost. No wonder many analysts estimate a very slow return to a 40-45% of pre-war traffic by year end, eventually stabilizing around 60-70% during next year. I personally think even that is way too optimistic: higher insurance costs and geopolitical risk premiums will make Persian gulf oil much less attractive for a long-long time to come.

“The maritime sector is likely to experience a prolonged period of elevated operational risk driven by insurance uncertainty, crewing concerns, legal complexities and residual geopolitical tensions.” — Richard Meade, Editor-in-chief, Lloyd’s List

Security concerns

The easy part in trying to end conflicts is agreeing to de-escalate. The hard part is keeping the two sides from pulling that agreement apart. This is especially so, when we consider that there is a third party, who was not involved in drafting and signing the memorandum, nor invited to be part of the negotiating team: Israel. They never accepted to be restricted in their military actions, and this is unlikely to change today with the signing of the memorandum. Tel Aviv says that since they have been left out of the negotiations they are not bound by the US-Iran deal, and thus are under no obligation to cease fire in Lebanon—as stipulated by the very first point of the agreement.² (Besides, Netanyahu needs the war to continue for political reasons, and thus chances for a lasting ceasefire with Hezbollah looks to be minimal at the time of this writing.)

With that said, US war hawks are also vehemently against the deal with Iran, and will do everything they can to stop its implementation or to prevent the administration from reaching a final agreement. As a sign of things to come the start of the talks between the US and Iran in Switzerland has been postponed already: “Vice President J.D. Vance, who had been scheduled to attend the talks, had canceled his trip. Reports did not specify the reason for the cancellation, although the IDF has confirmed striking southern Lebanon throughout the night.”

And they don’t have to hold out indefinitely: the many issues to be negotiated based on this agreement—of which the question of nuclear enrichment is but one—is inconceivable to be done in 60 days. (The previous agreement, torn up by the same US president who started bombing Iran in February, as well as last summer, took 2 years to negotiate for comparison). Why would be a resolution easier to reach this time, after trust in the US has been completely and utterly destroyed, and as the traffic through the Strait of Hormuz is now firmly in Iranian control?

It’s hard for me to see these two coming months as anything more than a fragile ceasefire, intended to calm the markets somewhat. The underlying conflict (not just vis-a-vis Iran, but regarding Israel and its neighbors) will likely stay unresolved and continue to simmer, leaving the question of sanctions or the release of frozen funds largely unresolved. The MOU is no guarantee that the war will not restart any minute either—any further aggression, most likely from Israel, has the potential to reignite the conflict leading to a renewed blockade. The upcoming talks, if they’re not cancelled completely, will thus about regaining and strengthening leverage.

The US will try to keep the talks going to gain some time, dangling sanctions relief and the release of frozen funds as a carrot in front of Iran. (Remember: the memorandum just signed is not the deal itself, its just signaling intent to reach an agreement along these lines.) Meanwhile Iran—if they do not see an improvement in Lebanon, and/or see no steps being taken to fully release those funds and to remove all those sanctions—could slow-walk if not outright cancel the release of ships through the Strait.

Long term interests

Although many in the alternative media see the memorandum signed yesterday—in Versailles³ of all places—as an epic defeat for the US, the ‘Opera ain’t over till the fat lady sings.’ And she is still busy applying make-up in the backstage… This war between Iran and the United States was just one battle in a much greater conflict over preserving US world dominance. Iran hasn’t won yet, either. It gained tremendous leverage by exerting control over the Strait of Hormuz, but also—perhaps paradoxically—played into the hands of America. So while many argue, that Iran’s leverage will just keep growing as global oil inventories continue to fall (even as shipping returns reluctantly), the same could be also told about the US.

The first thing to understand here, is that the release of strategic reserves (SPR) in America is not for domestic consumption. Most of it is lent to oil companies who then sell it abroad: mostly to Europe and Asia. And while it’s true that the US remains a net importer of oil (despite record exports) 88% of all oil processed in domestic refineries come from North America, with Venezuela providing an increasing amount of the rest. So while the US itself is still not self-reliant when it comes to oil, the Americas—led by the United States—are rapidly replacing the Middle East as the key source of global oil supply. The disruption around the Strait of Hormuz only helped to cement the States’ position.

Simply put: it’s not in America’s strategic interest to fully restore the flow of oil from the Middle East. With crude exports from the Western Hemisphere hitting a record 14.5 million bpd, the US has gained a tremendous leverage over not just one region, but the entire world. From kidnapping the Venezuelan president and taking over the country’s oil industry, to installing a close ally to lead Argentina’s shale oil revolution—or from waging a proxy-war on Russia and its oil refineries⁴ to starting and sponsoring a number of wars in the Middle East—the US has done everything to physically dominate world oil and gas trade.

The end of this fight for unparalleled petroleum hegemony is nowhere in sight either: the administration is actively building a Western led alliance in the Southern Caucasus, ultimately aimed at taking control over Caspian oil flows by building pipelines to Kazakhstan and other Central Asian states. (As well as further encircling Russia from the south and Iran from the north.) Energy is no longer just the economy, it is a weapon of war wielded by the most powerful state apparatus in the world in order to maintain its global political dominance. Simon Watkins—a person with whom I never thought I would agree—writes:

“[A]s delineated in the U.S.’s ‘2025 National Security Strategy’, Trump wants the world’s geopolitical system split into three geographical spheres, dominated by a major power in each. China would hold the primary role in Asia, while Russia would either dominate or significantly influence Europe, depending on how any future conflict between European NATO members and Moscow unfolds. But, at the top, the U.S. would maintain overall dominance and exert direct influence across the Americas (North and South America). Naturally, as energy underpins the economies -- and thus politics -- of every country in the world, shifting the centre of dominance in global energy supplies to the Americas is a core part of that aim. The U.S. is playing its part toward that, pumping oil at record highs, around a baseline of 13.6 million bpd, with plans for more down the line. Of the other major oil-producing countries in the Americas, Venezuela is top of Washington’s development agenda, followed by Argentina and then Brazil.”

From this perspective who cares if the rest of the world (including some of the Asian allies of the West) run out of oil and gas reserves? ‘Well, they will have to come to buy from us of course!’ And what if there is not enough oil to be exported, should the SPR start to run low? ‘Well, tough luck—as they say in Washington—I guess you have to wait a little till we ramp up production in the ‘newest addition’ to our energy portfolio.’ It follows from this logic, that should oil production and exports in and from the Persian Gulf ramp up ‘too fast’—i.e. to a level which begins to threaten the administration’s strong negotiation position with oil and LNG importing nations—all one needs is a little bombing campaign to have Hormuz closed again. As an old saying among plumbers goes: “He who controls the tap, controls the flow.”

Conclusion

With the sign of the Memorandum of Understanding between Iran and the US, the conflict over controlling world oil flows has entered a new stage. Leaving behind the kinetic phase of the conflict, for now at least, the new stage will be about maintaining strategic control over prices and flows, preserving the United States’ prime position in controlling the market. See, one doesn’t need to win all its battles and control every last drop of oil on the planet, it’s more than enough to leave the market artificially under supplied just by a little, and to prevent competitors from filling in that gap. (Cheers, Russia.)

Shipping, for a number of reasons from logistics, to willingness to take on a massive geopolitical risk, is unlikely to return to normal levels anytime soon. Moving 80 million barrels of oil out of the Gulf—compared to 1.1 billion barrels of oil not produced since March—will not move the needle. Only ships returning empty and leaving full could. Only then can producers draw down inventories, and only once inventories fall far enough can they justify restoring production. Without a more or less established shipping schedule at prices acceptable for both tanker operators and buyers, the restoration of oil production will not start in earnest. (Not that restarting roughly 10 000 oil wells, or around 15% of global supply, after more than 100 days of being offline would be a flip‑the‑switch exercise.) Till then countries will have to rely on their ever thinner inventories—if they last that long.

Lower oil prices in the meantime—inspired by unsubstantiated hopes and blind faith in a recovery which might never come—will make sure that remaining stockpiles would be drawn down even faster. Expectations that a gush of oil from the Persian Gulf will eventually hit the market, will further accelerate that process. And if less then an ideal number of ships enter the Gulf to bring more oil to market, or production recovery takes much longer than anticipated⁵—or perhaps the US administration decides its time to cut back on Persian Gulf exports again, throwing in a few bombs for good measure—then refilling those storage tanks will remain a pipe dream.

Until next time,

B

Thank you for reading The Honest Sorcerer. If you value this article or any others please share and consider a subscription, or perhaps buying a virtual coffee. At the same time allow me to express my eternal gratitude to those who already support my work — without you this site could not exist.

1. According to Lloyd’s List there are 160 tanker ships still trapped in the Gulf, out of which 50 classified as VLCC-s, or very large crude carriers capable of holding 2 million barrels of crude. The rest are mostly Medium Range petroleum product tankers (MR1 and MR2), able to carry 300-450 thousand barrels, as well as some Panamax and Aframax Long Range vessels (500 and 750 thousand barrels respectively), and a few Suezmax (1 million barrel) ships. That’s around 160 million barrels in total—presuming that all of them are filled up to the brim. Depending on their loading status, and their willingness to cross the Strait, there is much more oil to be delivered to buyers than what the OilPrice.com article linked above indicates.

2. Although the US could literally clip Israel’s wings by denying air refueling, bombs, intelligence (not to mention using the airspace of Saudi Arabia) needed for a renewed Israeli strike on Iran, the administration is unlikely to completely abandon Israel and withdraw the military/intelligence support needed for the continuation of the Lebanon campaign.

3. The hall of mirrors in Versailles, France, where president Trump signed the memorandum of understanding with Iran was also the location for the signing of the Treaty of Versailles in 1919, which officially ended World War I with a humiliating German defeat.

4. “The FT said U.S. intelligence helps Kyiv shape route planning, altitude, timing and mission decisions, enabling Ukraine’s long-range, one-way attack drones to evade Russian air defences. The United States is closely involved in all stages of planning, it said, citing three people familiar with the operation.” Source: Reuters

5. If recovery after COVID—a similar sized disruption—is any guide, it will take years till we could climb back to pre-war oil production levels. Drilling crews, equipment, skilled labor will all be in very short supply for a very long time. The war on Iran affected the entire region leaving thousands of (potentially damaged) wells, refineries, and other infrastructure behind. Cleaning up this mess will definitely take more than a month or two, especially when suddenly everyone wants the same guys using the same equipment to work on their fields.