Why The Iran Peace Deal Is Really An Oil Deal

Make no mistake about it: The peace deal between the U.S. and Iran is, at its heart, an oil deal.

Yes, myriad other implications are in play in the 14-point agreement, but there is no question that oil, and the urgent need to get oil flows through the Strait of Hormuz quickly restored was the driving force behind getting this deal done now.

ExxonMobil CEO Darren Woods laid it all out in remarks delivered during his company’s first quarter earnings call on June 8, warning analysts that the paper markets have yet to absorb and account for the full impacts of the 3-month-long closure of the Strait. “There was a lot of oil in transit on the water, a lot of inventory on the water that has been deployed in the first month of the conflict. Strategic petroleum reserves have been released, commercial inventories have been drawn down,” Woods said, as first reported by CNBC.

Woods echoed previous remarks by Chevron CEO Mike Wirth and ExxonMobil Senior Vice President Neil Chapman at the May 28 Bernstein conference, warning that once the market fully accounts for those cushioning factors, crude prices could rapidly rise unless the Strait fully reopens, and fast. (RELATED: Oil Plummets After Tentative US-Iran Peace Deal)

What were those cushioning factors that so many of the experts — including the International Energy Agency (IEA) — missed at the start of the crisis?

There was more oil stored on the water, more oil in underground and surface storage around the world than experts believed.

Countries were also able to adjust faster to a constrained supply situation than anticipated by most experts. China was a great example, as it quickly moved to cut its import needs by 4 million barrels of oil per day (bopd) by hoarding its own refined products and domestic production. Thanks largely to U.S. influence, Venezuela quickly added half a million bopd to the market as well.

Experts also underestimated how quickly Saudi Arabia would be able fully fill its 7 mmbopd pipeline to bypass the Strait. IEA even underestimated the fast impact its own coordinated strategic reserve release program would have as it ramped up.

These and other cushioning factors sent calming messages to the paper markets where the Brent and WTI index prices which govern international and U.S. oil contracts are determined. But the paper markets do not necessarily conform to realities in the physical markets, where deliveries of crude oil cargoes were frequently traded at prices exceeding $140 per barrel while the Brent index lingered below $100.

The prospect of this bifurcation in prices disappearing as crude inventories threaten to reach tank bottoms at key distribution centers like Cushing, Oklahoma as July 1 approaches created an urgent need to reopen oil flows through Hormuz ASAP.

Here, it is important to grasp the role these major hubs play in moving oil and refined products like gasoline and diesel to refineries and market centers. The Cushing hub connects into a vast distribution network which moves the products all over the country. That network is made up of 20 inbound pipelines which feed products into Cushing’s storage tanks from all over the country, and 14 outbound lines which distribute those products to refineries and market centers.

A disruption of flows into and out of Cushing — or the various other distribution hubs around the Lower 48 — would result in an immediate run-up in prices as refineries and retailers bid up the price of physical cargoes. 

Now, the question becomes whether this U.S./Iran deal to reopen oil flows through Hormuz has happened in time to avoid such a crisis. In reality, no one knows the answer to that question just yet. 

The paper markets responded positively to the news of this peace deal — that was easy to predict. As of this writing, WTI is trading around $77/barrel, and gasoline prices have dropped below the $4/gallon mark according to Gasbuddy, providing welcome relief for families as summer driving season gets fully underway. 

The question now becomes, can it last? As President Trump is fond of saying, we’ll just have to wait and see what happens. Keep your fingers crossed.

David Blackmon is an energy writer and consultant based in Texas. He spent 40 years in the oil and gas business, where he specialized in public policy and communications.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.

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