So apparently, the USS Winston Churchill (a guided-missile destroyer capable of toting around 90 Tomahawk missiles) has entered the U.S. Navy’s area of operations that includes the Mediterranean.
Obviously, that sounds ominous in light of Trump’s tweets about “nice, new” missiles and a certain “gas killing animal” that the President wants to subject to a little bit of his patented “fire and fury” if for no other reason than to let off some steam as the FBI closes in on him.
It’s hard to know what to make of this situation. As noted last weekend, the last thing you want to do here is buy into the bullshit propaganda about “false flag” attacks and “staged” death scenes involving children – don’t be the guy/gal who reads Russian agitprop and mistakes it for “alternative” news. If it sounds like it’s agitprop, it’s probably agitprop. Clearly, Assad is a war criminal, it’s just a matter of determining which war crimes he’s responsible for. It is doubtlessly true that he’s deployed chemical weapons against the civilian population at various times during the course of the civil war. That said, it is of course impossible to know with absolutely certainty what the fuck is going on in Syria on any given day, so there’s always going to be room for blamecasting and sowing doubt on all sides.
At this point, one wonders if Trump, May and Macron haven’t missed their window for a quick strike on Assad. He’s moved his assets around now and he’s undoubtedly going to try and position himself figuratively and literally behind Russian assets in an effort to make the Western powers choose between risking killing Russians and doing some kind of actual damage to the regime. So I guess the question now is how would the U.S., the U.K., and France even go about doing anything meaningful having lost the element of surprise? It almost seems like the only option is for some kind of actual, invasive strike that goes well beyond what we saw last year when Trump hit a largely empty airfield with a volley of Tomahawks.
This is all playing out against the crippling sanctions against Russia that sent investors scurrying earlier this week. Some of that panic has abated, but the angst is palpable and isn’t likely to dissipate completely any time soon.
Who knows – all we do know is that geopolitical risk is front and center and that’s something that everyone on the sellside is now forced to talk about. For their part, Barclays notes that we’re back to “cold war politics.” To wit, from a summary of this week’s geopolitical events found in a note dated Friday:
Geo-political risk heated up this week The US Office of Foreign Assets Control (OFAC) designated United Company Rusal PLC, a eurobond issuing-entity, as a specially designated national (SDN). This is significant, as US persons owning debt and equity of the entity will have to divest their holdings by May 7, 2018 under a General Licence. This unprecedented step had a significant effect on Russian asset prices, with the RUB falling by 12% against the US dollar from peak to through. The political rhetoric between Russia and the US continued to heat up throughout the week. The US, UK and France announced that they would take action in response to an alleged chemical weapons attack in Syria sanctioned by the government. And, while Russia stated that it would protect Syria from any western missile strikes, the US stated that missile strikes were a likely response to this atrocity, regardless of the threat from Russia. Such rhetoric continued to escalate rapidly and, we think suggests the risk of further political turmoil in the Middle East. The evolution of these events could influence President Trump’s decision on whether or not to extend waivers on Iran sanctions on 12 May 2018.
Note that bit there at the end about Iran sanctions. That’s got Goldman thinking about the “Bolton premium” in crude.
“The appointment of John Bolton as National Security Advisor and Mike Pompeo as Secretary of State, both vocal Iran hawks, has significantly increased the odds of the sanctions being reintroduced,” the bank writes, in a new commodities note, before adding that “the decision depends to some extent on the EU, which is currently debating introducing sanctions in response to Iran’s ballistic missile program, although so far no agreement appears to have been reached.”
What happens for crude in the event something goes awry there? Well, on that score Goldman kind of reiterates their analysis out last year when tensions between Washington and Tehran were flaring up. To wit:
If the US reintroduces the secondary sanctions, we would expect European refiners to reduce imports from Iran, even without participation from the EU, given their exposure to the US, either through assets or product trade flows. The EU accounts for 25% of Iran’s 2.6 mb/d crude exports but we believe the key for the global oil market is whether these flows will be curtailed rather than simply redirected to Asia (see Exhibit 11). The impact of potential US sanctions on international insurance and shipping will be key to this outcome. Without the support of other countries, it appears unlikely that production would fall much and we expect that several hundred thousand barrels of Iranian exports would be initially at risk. Further, the secondary sanctions may not have an immediate impact on the oil market: they historically offered exemptions and a phase-in period and only require that countries reduce Iranian crude imports by 20% every 180 days.
Those are the technical details, but Goldman goes on to revisit the larger issue which is that between Bolton on board at the White House, Trump being increasingly unhinged (Goldman doesn’t put it that way, but everyone knows what’s going on here), and Riyadh seemingly more determined than ever to curb Tehran’s regional ambitions, the chances of an outright conflict between Saudi Arabia and Iran are elevated.
Key to the impact on the oil market would be how Saudi Arabia decides to respond. Potential losses from Iranian production would support oil prices by $7/bbl (assuming 500 kb/d outages for 6-mo, and modeling the impact of such an inventory shock on timespreads). This 10% increase in prices would halve the export revenue impact for Iran. So in this situation, Saudi Arabia may decide to increase production to prevent higher oil prices from softening the impact of the sanctions on Iran. Net, while the reintroduction of US secondary sanctions on Iran is increasingly likely, the lack of global coordination suggests a limited production impact initially. Of course, the odds of steeper military escalation in Iran have increased with the recent changes in the US administration. Further, a direct conflict between Saudi Arabia and Iran could create a dramatic impact on the oil market if local producing or refining assets were impacted.
For his part, Mnuchin was careful earlier this week to emphasize that a decision by Trump not to renew the sanctions relief next month would not necessarily entail the U.S. withdrawing from the Iran nuclear deal.
Anyway, make of all that what you will. The point is that geopolitics is once again in the limelight and this time around, it looks like it has the potential to impact markets more so than it has in recent years.
After all, the market’s muted response to geopolitical turmoil in 2016 and 2017 was in large part down to the central bank put, which is now in question. And it goes without saying that the low vol. regime seems to have come to an end over the past couple of months.
Oh, and finally, don’t put too much stock in anything you read from pro-Russia sites about Moscow’s willingness to engage in an outright military confrontation with the U.S., the U.K., and/or France. That’s clearly absurd. They’re in no position to do that and if they risked it even for a week, it would be economic suicide.