Oil was dumped on Wednesday following Axios fake news regarding a peace deal, only to rebound sharply and recoup half of its losses on the same day. A breach below 80 would suggest real progress toward a peace deal, while a break above 115–120 would suggest escalation. Any volatility that fails to achieve either of these levels should be treated as noise.
When the war first started, I mentioned that this could turn into a years-long war. We have now entered the third month of the war, and we still see no clear path to peace.
The situation can only be resolved through one of two outcomes. The first is a victory by Iran, which would mean Iran keeps at least one of its two core cards: its nuclear program or leverage over the Strait. The second is a victory by the US, which would require both killing Iran’s nuclear program and removing Iran’s leverage over the Strait.
So far, Iran still holds both cards. I do not see why Iran would voluntarily give up both. History shows that once you give up your leverage, you are permanently weakened. Iran understands this. It may be willing to compromise on one card, but not both. This is exactly what we have seen in the proposed peace framework, where Iran appears to leave its nuclear program outside the deal.
For Iran to give up its nuclear program, it would need a credible guarantee that Israel will not attack Iran. But as I mentioned before, expansion is existential for Israel, and oil prices are not a major concern for Israel. As Israel expands, it cannot avoid conflict with Iran, either directly or indirectly. Therefore, Iran is unlikely to give up its nuclear program, because it sees it as a necessary deterrent against Israel.
That, however, is a non-starter for the Trump administration. This is the core conundrum.
Given the continued rise in crude and refined product prices, along with the midterm election, Trump is not poised to escalate. However, it is imperative to understand that even without escalation, the path of least resistance remains to the upside, as global inventories continue to dwindle each and every day.
12hOil is edging higher as no progress is being made on a peace deal and Strait volume remains low. A breach below 98-100 opens the door to a test of the 81 level, though I think the odds of seeing this soon are very low, given that Iran will give up neither its nuclear program nor its control of the Strait. A breach above the 115-117 area opens the door to 140.
