Ref: AD-3042
Summary: fresh US sanctions are unlikely to hurry the Iranians back to the negotiating table. But the current upward trend in the oil price and the consequent risk of permanent demand destruction may, in due course, subdue the hardliners in Tehran, especially if China is goaded by Washington into exploiting its ‘swing consumer’ status to push prices higher still.
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Following US Treasury Secretary Scott Bessent’s ‘elaboration’ on Donald Trump’s ‘economic D-Day’ against Iran Brent crude has slipped by around US$6pb. Given that no new sanctions were actually imposed, that Tehran has dismissed the whole caboodle and (perhaps most importantly) China has committed to retaliate if it is targeted with secondary sanctions, this may seem surprising. But strange things can happen in August when many fund managers are taking a break and this reaction feels very like the rapidly reversed rally Mr Bessent spurred last week in his equally dismal attempt to tame the bond market.
Reference to the bond market is very pertinent. The interest rate on long duration US government bonds (aka Treasuries) has been easing upwards for some time now but, unusually, this is not principally because of inflation expectations (even though these have recently started to creep up).
The substantive link between these two issues is a simple one, i.e. higher oil prices will drive up inflation which will then see investors demanding a higher return on US government debt, pushing what is known as the ‘long end’ (of the yield curve) higher still. This is precisely what Mr Bessent was trying to argue against last week – unsuccessfully even without the added complication of the threat of escalating economic pressure on Tehran.
Even before Mr Bessent intervention yesterday the FT’s Katie Martin had written (on 22 August, in fact) of his bond market intervention as follows:
“Scott Bessent’s running battle with the bond market is starting to look like his boss’s war in Iran — started by his own hand with a tangled set of objectives, an underestimated opponent and an implausible path to victory. And like the conflict in the Middle East, we are all going to suffer its effects.”
That the two losing battles he is fighting have become increasingly entangled is therefore more than somewhat ironic.
Adding to my comment published earlier today (but written yesterday) Brent finished up the day down by around eight bucks. While Scott Bessent generated some of the slide, it is likely that the bigger factor in play was news that Oman and Iran are talking again. On the face of it, this is good news. But it certainly does not justify by a large margin an eight percent drop in the price of oil. For starters, there is nothing to suggest that Iran’s negotiators have the final word in Tehran – quite the contrary, in fact, as, for all the open differences of view there, it does appear to be the hardliners who are ultimately calling the shots. Second (and consistent with this), Tehran has (unsurprisingly) reiterated today that any opening of the Strait of Hormuz is dependent upon the US lifting its blockade and it is hard to imagine how even Donald Trump could do this and claim victory on the basis of an agreement between Iran and a third party which only covers passage through Hormuz and doesn’t even begin to address the nuclear issue.So, even if Tehran and Muscat do reach agreement the chances of it being implemented seem to be pretty slim.