By Barani Krishnan
Investing.com – An eye-for-eye? Or, more specifically, a drone-for-a-drone?
When it comes to the U.S.-Iran crisis, it’s hard to tell fact from fiction. And which side or story to believe.
Since Donald Trump turned the screws on Iran all the way up with his sanctions, targeting not just its oil but also its president, Hassan Rouhani, and spiritual leader Ayatollah Ali Khamenei, the biggest geopolitical drama in energy has gotten quirkier by the day.
In June, Iran shot down a U.S. surveillance plane, adding to tensions in the Strait of Hormuz. A month later, the U.S. president claimed to have achieved the same, with an Iranian drone.
The only problem is Tehran says it has lost none of its spy planes. In fact, it suggests the U.S. may have accidentally destroyed one of its own -- yes, American -- drones.
All these might make excellent content for a spy spoof. But oil bulls who lost as much as 8% on the week on counter claims by the two sides and worries about crude demand aren’t really in the mood for laughter.
Aside from the disputed downing of the Iranian drone, there are tales of seizure and counter-seizure of oil-laden vessels between Britain and Tehran. And again, denials here and there by the Islamic Republic.
As the situation escalates, officials in Washington indicate they’d like peace, and possibly a China- or North Korea-style summit between Trump and Rouhani. No need for a photo-op or big two-page document of signatures, says Iranian Foreign Minister Mohammad Javad Zarif. Just remove the sanctions, and talks -- even a deal -- could happen, he adds. And the drama continues, with no end in sight. “Phases of escalation followed by renewed peacemaking efforts would appear a likely pattern,” New York-based Energy Intelligence said in its Petroleum Intelligence Weekly.
With gold, expectations for a U.S. rate cut before the start of August kept gold supported in the $1,400 range, landing a second-straight week of gains for the precious metal.
But even there, Trump featured. The president repeated his call for lower interest rates in several tweets on Friday, accusing the Federal Reserve of sticking to a “faulty thought process”. Markets, meanwhile, contemplate the possibility of a 50-basis-point cut at the July 30-31 policy meeting.
Energy Review
The crux of the U.S.-Iranian standoff is whether the two sides can agree to anything at all. Thus far, both have tacitly avoided an outright war -- Trump’s standing down from a retaliatory attack on Iran two weeks back being the best testimony of this. So, there’s hope for an amicable ending, though it’s highly debatable if that conclusion will be mutually satisfying.
Talks with Iran would instantly achieve two of Trump's immediate objectives: lower oil prices and a chance to reset yet another Obama-era "mistake".
Eventually, the president can gloat on how the "Trump Iran deal" is the better one for the world, versus Obama's original 2015 accord, which he had labeled as the "worst deal ever".
Agreeing to talks with Iran makes total sense for Trump, who needs crude prices to fall in order to make the U.S. pump price of gasoline cheaper before his re-election bid in November 2020.
The president has said in the past that he wants OPEC to pump an additional 2 million barrels per day of oil to lower energy costs for U.S. consumers. Yet, the Organization of the Petroleum Exporting Countries has gone the other way, tightening supply by 1.2 million barrels per day since December 2018, and wants to do the same now through March 2020.
Logic compels Trump to agree to a sit-down with the Iranians because that additional 2 million bpd he's seeking from OPEC is right there with Tehran. After the signing of its original 2015 nuclear accord with the Obama administration and other world powers, Tehran produced up to 2.5 million bpd at its peak.
While it’s unlikely that Trump would agree to set aside all the sanctions he’s built against Iran’s oil and its leaders in order to bring Tehran to the negotiating table, it’s possible that he could meet Iran’s demands half-way. Trump could suspend his most objectionable sanctions against the Islamic Republic for a specified period – say three months -- to give the peace process a chance.
Investing.com’s projections are that West Texas Intermediate and Brent will fall about $5 a barrel each within a week or two of the announcement that Iran and the U.S. are ready to talk. And every rebound thereafter will be checked by the possibility of an impending Iran Nuclear Accord 2.0. Just to note: Despite weekly data showing another outsize U.S. crude inventory drawdown, the Iranian factors saw WTI booking its deepest loss in seven weeks this week.
Crude was also down this week compensating for overruns in damage estimates from Hurricane Barry. Coming ashore in central Louisiana on Saturday as a Category 1 hurricane, Barry quickly weakened into a tropical storm. Oil companies have since reopened their platforms, pressuring prices.
Earlier in the week, Trump said a trade deal with China might not happen right away and that he considering heavier tariffs against Beijing, which did not buy U.S. farm products as expected. Any negative news on China tends to hurt oil prices as well.
Energy Calendar Ahead
Tuesday, July 16
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, July 17
EIA weekly report on oil stockpiles.
Thursday, July 18
EIA weekly natural gas report
Friday, July 19
Baker Hughes weekly rig count.
Precious Metals Review
Although Fed Chairman Jerome Powell has repeatedly shrugged off Trump’s attacks, citing the central bank’s independence and a lack of necessity to responding to short-term political pressure, markets are convinced there will be at least a quarter-point cut and there's a 60% chance rates will be 50 basis points lower after the September policy meeting, according to Investing.com's Fed Rate Monitor Tool. That would put the key federal funds rate at 1.75% to 2%.
Beyond the Fed, central banks worldwide have been taking an increasingly dovish stance on monetary policy to the benefit of non-yielding gold.
The European Central Bank is widely expected to give signs of further easing in the coming week, with market odds for a cut having even surpassed 50% on Friday. Smaller central banks such as South Korea or South Africa already took action on Thursday.
The outlook for lower interest rates has spread across the fixed income market resulting in $13 trillion worth of bonds with negative yields, increasing the appeal of gold.
John Reade, chief market strategist at the World Gold Council, compared the performance of gold to bond yields in a series of tweets and reminded his followers that “zero is just a level, not a floor”.
In another bullish factor for the outlook, the “hoarding” of gold by central banks looked set to continue for the following year, according to a survey conducted by the World Gold Council and YouGov.
According to the poll of central banks, 54% of respondents expect global holdings to climb in the next 12 months amid concerns about risks in other reserve assets.
Gold futures for August delivery, traded on the Comex division of the New York Mercantile Exchange, slipped $1.40 to settle at $1,426.70.
Bullion rose about 0.6% on the week despite weaker-than-expected U.S. housing data, while the IMF called the dollar, "overvalued."
Precious Metals Calendar
Tuesday, July 23
U.S. Existing Home Sales (Jun)
Wednesday, July 24
Japan Manufacturing PMI (Jul)
Euro Zone Manufacturing PMI (Jul)
US Manufacturing PMI (Jul)
U.S. Services PMI (Jul)
U.S. New Home Sales (Jun)
Thursday, July 25
U.S. Durable Goods Orders (Jun)
U.S. Trade Balance (Jun)
U.S. Initial Jobless Claims
German Ifo Business Climate
ECB rate setting meeting
Friday, July 26
U.S. advance GDP