Another Look at Trump, Iran and Oil Markets

We largely take the view that greater sanctions enforcement targeting Iranian oil exports will be relatively ineffective. Whilst Trump will attempt to exert pressure on Iranian exports as part of a wider Maximum Pressure 2.0 policy , it will be harder this time around given concentration of Chinese teapot refineries with limited dollar exposure on the buy-side. However, in the context of the deteriorating regional security situation US assurances, support and constraints have shaped the Israeli reaction function as Iran has launched several missile barrages as part of Operation True Promise 1 (13 th April) and 2 (1 st October). Additionally, Iran’s own calculus may shift with Trump in power. In our note Iran, Israel and Energy Prices we outlined our view that escalation in the Iran-Israel conflict would be difficult to contain, with the market too hyper focussed on the specific target of Iran’s counterstrike. With rhetoric from Iran’s senior leadership ramping up substantially over the past week, it seems likely that the conflict will expand further. This is where the Trump’s election victory may change things. Israel’s pledge not to strike Iranian energy infrastructure was allegedly only in-play before the election , whilst wider Republican thinking towards the region (to empower allies to police and contain Iran) may effectively give Israel more room to operate . Whilst oil-related impact is relatively far up the escalatory ladder (particularly strikes on regional energy infrastructure, but also a Hormuz blockade) the emergent dynamics in the Israel-Iran conflict, and Iran’s changing views on actions required to maintain deterrence – coupled with an administration adding fewer constraints to Israeli action - may result in the situation escalating faster than anticipated, impacting Iranian oil flows in a way sanctions would not.