Oil price manipulation, an unrecognized stratagem and an unhinged plan

Governments around the world are desperate to bring down oil prices in the wake of a cutoff of about one-fifth of the world’s supply due to the Iran war. Here are some of the moves we’ve seen so far:

1. The International Energy Agency, a consortium of 32 countries which coordinate energy policy and emergency readiness, called an emergency meeting to discuss release of strategic petroleum reserves to ease prices. The countries agreed to a release of 400 million barrels from reserves held in underground caverns and above ground in storage tanks, the largest release ever of such reserves.With about 20 million barrels per day no longer available from Persian Gulf exports because of the Iranian closure of the Strait of Hormuz, the narrow passage from the gulf to the open sea, this release represent just 20 days of oil deliveries. But it is unlikely that the daily release of oil will be more than a fraction of the lost barrels given constraints on how fast the reserve can be accessed. So it’s not surprising that oil prices actually went up after the announcement.
2. Of course, I would be remiss in not pointing out that Iran’s closure of the Strait of Hormuz was the initial manipulation of the world oil price as it vowed to push oil prices to $200 per barrel.
3. Some countries are implementing price caps, rationing and reducing the workweek in order to cope with shortages of oil products such as gasoline and diesel and to shield consumers from the rising cost of such products.
4. The U.S. Department of the Treasury announced that it may intervene in the futures market for oil to tamp down speculation. Oil market participants were somewhat skeptical that such intervention would have much effect because the oil futures market must ultimately take its cues from physical supply and demand. Oil futures contracts call for delivery of crude oil if they are not closed out before the delivery date specified in each contract. That keeps them closely tied to the physical market. And the physical market is where the problem is today.Not surprisingly, the heads of major futures and stock exchanges didn’t like the idea of the U.S. Treasury Department manipulating oil futures prices. After all, such manipulation would be considered illegal if private individuals did it. Moreover, public exchanges are meant to be places for price discovery. How can customers using those exchanges expect to discover the true price of oil if the U.S. government is putting its thumb on the scale? Government intervention will destroy the credibility of the futures exchanges sending customers elsewhere to hedge their exposures.
5. Then there is simple jawboning. After oil reached about $120 per barrel on March 8, the following day President Trump held a news conference in which he said the Iran war could be over “very soon” which caused the oil price to plummet.Now, here is a stratagem that few people recognized as intentional manipulation: The following day the U.S. Secretary of Energy Chris Wright posted on social media that “the U.S. Navy successfully escorted an oil tanker through the Strait of Hormuz to ensure oil remains flowing to global markets.” Or rather someone who manages his account posted that. The oil market swooned another 19 percent immediately afterward. The post turned out to be false and was quickly deleted. The market recovered but was down 12 percent for the day.This move was either another attempt to jawbone the market lower or it was a scheme by administration insiders to profit from a move they engineered by making the post. Most media outlets simply portrayed the post as a mistake without understanding that it might have been deliberate for one of the reasons cited. The energy secretary has vowed to investigate. I’ll be very surprised if we ever see any findings from that investigation. Was this part of the plan of the U.S. Treasury Department to manipulate the futures market or was it the action of a rogue employee? We’ll probably never know.
6. There is additional jawboning in the form of the United States offering temporary waivers to countries that wish to buy oil from Russia. Russian oil is under sanctions that began after the Russian invasion of Ukraine as a way to punish Russia. U.S., European and G7 governments implemented the sanctions (which went well beyond oil) and have also imposed so-called “secondary sanctions” which means that businesses and banks in other countries who engage in commerce with Russia in violation of the sanctions may themselves be sanctioned. The oil sanctions consist of price caps, insurance bans for illicit ships, asset freezes on Russian oil companies, bans on foreign investment and projects, and many other measures. Here is an account of the energy sanctions on Russia, Iran and VenezuelaThe purpose has been to reduce the income Russia gets from exporting oil via price caps while NOT depriving the world market of oil from the world’s second largest exporter. And, Russia has in any case has been successfully circumventing the sanctions by using its “shadow fleet”, that is, a fleet the ownership of which is difficult to discover and which uses a host of tactics to keep from being detected. In addition Russia has sold much of its oil to China and India who never agreed to the sanctions.So, why am I telling you all this? To demonstrate why the waivers are just another tactic to jawbone the price of oil down. They won’t make much difference in the available supply and they are allowing the Russia to reap a huge windfall as Russian oil companies are allowed to charge market prices which are now well beyond the cap of $60 per barrel and well beyond the extra discounts ($40 per barrel) Russia was giving to those flouting the sanctions.
7. And finally, there is either the ultimate in jawboning or the ultimate in folly. There are hints that the U.S. administration is working on a plan to open the Strait of Hormuz. Navy Times reports that 5,000 personnel including marines are being deployed to the Middle East along with amphibious landing craft. Either the administration is trying to make the world think that the U.S. military is about to try to open the Strait of Hormuz or the administration actually is planning on trying to open the strait. If it is the latter, it seems to me to be a fool’s errand that is unlikely to succeed. The Iranian military has demonstrated its ability to target whatever it wants to blow up very precisely with drones and missiles and the military appears to have an ample supply of these weapons.

Of course, the fastest way to bring down oil prices would be to end the war with Iran. The fastest way to do that would be to accede to all of Iran’s demands which include retaining its nuclear development program, retaining its military without restrictions on weapons, reparations for damage done to Iran and international guarantees that it will not be attacked again.

Given the rejection by Israel and the United States of these demands and given Iran’s seemingly endless supply of drones and missiles and its stranglehold on the Strait of Hormuz, we can expect the war to drag on until Israel and the United States either take over Iran using ground forces or accede to some or all of Iran’s demands. Otherwise, there will be no practical way to guarantee the safety of oil tankers transiting the Persian Gulf and the Strait of Hormuz. Gauge the likelihood of either side getting what it wants anytime soon in order to assess how long the world will be drastically short on its daily ration of oil.