Macro: Sandcastle economics
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Oil is one of the best performing commodities of this year, having recorded an impressive 19.7% year-to-date gain. The rally remains very much in effect after this past weekend’s Opec+ meeting in Algeria, which saw Brent crude rise to a four year high after the cartel and its Russian partners resisted calls from President Trump to increase global oil output. The twin effect of this together with the looming sanctions on Iran could likely propel oil higher still.
Last weekend we also saw a terrorist attack in an oil-rich part of Iran that could have serious implications for the region, particularly if the important oil trade route through the Strait of Hormuz is disrupted by either terrorists or Iran itself. Should Iran cordon off the strategic Strait of Hormuz, nearly 20 million barrels of crude oil or 40% of global oil exports would be affected.
The US, which withdrew itself from the Iran nuclear deal or Joint Comprehensive Plan of Action (JCPOA) pact in May, is likely to place still more pressure on Iran while exhorting the European Union to the same in the form of levying sanctions.
President Trump has been vocal about shutting down all business and corporate ties between Iran and the US; officials have said they want Iranian exports to drop to zero by November 4, adding that they will talk to other countries/companies to cut back their oil imports as well. Daniel Jaeggi, president of commodity merchant Mercuria Energy Trading, warned that almost 2 million barrels/day of crude could be taken out of the market. While countries such as China and India could potentially remain nonchalant about such a ban from the US, it would still doubtlessly put pressure on oil.