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Escorted Hormuz oil flows give Iran more reason to escalate before the midterms, analysts say
Analysts expect Iran to drag the war past the Nov. 3 midterms, even as U.S.-escorted Middle East oil exports climb to almost 13 million barrels a day. Their case is that the escorted barrels cost Tehran leverage and leave escalation as one of its two remaining options.
The Investor · Invest desk
What happened
- The U.S. is blockading Iranian oil shipments at the same time as it escorts other cargoes out of the Middle East.
- Iran is demanding control of the Strait of Hormuz and the right to charge tolls, while the U.S. insists on nuclear concessions up front.
- Iranian officials are split between public-facing politicians and an increasingly powerful Revolutionary Guard, and both want maximum leverage over Trump in the election cycle.
- Dan Pickering of Pickering Energy Partners said a U.S. escalation after the midterms is probably more palatable because the war is not politically popular.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- contradiction Reed puts the danger before Nov. 3, while Macquarie places the priced swing after it, so hedges bought on post-election volatility could miss a strike before the vote.
- cost Fuel buyers would take any escalation on top of gasoline at seasonal records and diesel at all-time highs, and analysts expect a military uptick to push both higher.
- constraint If Raymond James is right that a deal is unlikely within six months, supply plans rest on escorted, below-February volumes for at least that long.
- decision Washington prefers to hold the status quo until after the vote, so for now it is neither conceding nor escalating, and Iran chooses when the next move comes.
Almost 13 million barrels a day against February's 19 million [2][3] is about 68% of the February rate, a shortfall of roughly 6 million barrels a day [1]. Fortune reports that the U.S. is holding even that level through military escorts at a high financial cost [5]. It also reports that the added barrels are largely offset by China increasing its oil imports [6].
Matt Reed, president of the consultancy Foreign Reports, sees the risk coming from that recovery. "Clearly, Iran is losing leverage, its economy is tanking, and its oil exports have collapsed," he told Fortune [7]. He compared the cycle of talks and flare-ups to "Groundhog Day" and warned that "we're being lulled into a false sense of security, and the situation could still deteriorate," calling it "a very dangerous moment" [8]. On motive he was blunt. "If Trump is not willing to give the Iranians what they want, then their goal will be to humiliate him," Reed said [9].
The analysts Fortune spoke to lay out three ways the run-up to Nov. 3 could go. The first is Reed's: "I think Iran is more inclined to lash out or escalate before the election. And Trump would be more tempted to push off escalation until after," he said [10]. The second is the post-vote U.S. escalation that Dan Pickering describes [11]. The third is that nothing moves at all, and Pickering holds that view as well. "I think the midterms are a line of demarcation. It's just not clear to me that anything is going to happen before or after them," he said [12].
The options market is pricing the second and third paths, or rather the date when one of them wins out. "Implied volatilities are starting to price in divergent two-way outcomes after Nov. 3, when events can shift wildly one way or the other," Macquarie strategist Thierry Wizman wrote in a note [13]. (Fortune links more conflict to more inflation, costlier fuel, greater government spending and higher bond yields [23].) Reed's danger falls in the weeks before that date [10].
I think Reed has the better case for the weeks before the vote. Iran's own exports have collapsed while the region's recover [7], and the election gives Tehran a date to aim at [10]. The counter-case is patience, and Marshall Adkins, head of energy at Raymond James, made it. "Getting to some kind of agreement that you can hold the IRGC to is going to be extremely difficult. They're being patient," he said [15].
The view is wrong if escorted exports keep climbing through Nov. 3 with no new attack on shipping [2]. It is also wrong if the first large move in oil comes after the vote, where Wizman says implied volatility is already concentrated [13].
What to watch
- Implied volatility on oil options expiring before Nov. 3 against those expiring after, the split Macquarie's note describes.
- Any movement on Iran's Hormuz toll demand or the U.S. condition of up-front nuclear concessions, the two terms keeping talks apart.
- Chinese crude import volumes, since Fortune reports they are absorbing most of the extra escorted barrels.