(CNN) — When President Donald Trump called off a planned attack on Iran and agreed to return to the negotiating table for peace talks, oil prices plunged.
“I agree to suspend the bombing and attack of Iran,” Trump said in a Truth Social post. “It is an Honor to have this Longterm problem close to resolution.”
That was April 8, when Trump declared a ceasefire with Iran. Oil fell 13% that day.
For the past five months, Trump has repeatedly reported significant progress in negotiations with Iran, leading him to call off planned military action against Iran, sending oil prices lower.
It happened last week, too, when oil tumbled 20% over the course of three days after Trump paused plans to attack Iran. And it’s happening again today: Oil is sinking 5% after Trump called off a “massive attack” on the country and said negotiations would resume.
By now, you’d think the oil market would have learned its lesson and stopped believing the President Who Cried Peace. But the oil market remains compelled by Trump’s narrative, exercising saint-like patience as deadlines come and go, negotiations ebb and flow and bombing starts and stops.
“Great Progress has been made toward a Complete and Final agreement with Representatives of Iran,” Trump said, agreeing to postpone a military intervention in the Strait of Hormuz.
Shoot, sorry, that was May 5. Oil fell 13% over three days after that post.
Groundhog Day
The oil market has been volatile over the course of the war, gaining 9% or more over six single-day or multi-day stretches since the beginning of March. But the market has been biased toward peace, tumbling 9% or more over single- or multi-day stretches eight times over the same stretch.
Most of the declines were the result of Trump or his administration declaring progress in negotiations or promising the reopening of the Strait of Hormuz.
March 10: Energy Secretary Chris Wright falsely claimed a US naval vessel escorted an oil tanker out of the strait. Oil tumbled 11%.
March 23: “I AM PLEASE TO REPORT THAT THE UNITED STATES OF AMERICA, AND THE COUNTRY OF IRAN, HAVE HAD, OVER THE LAST TWO DAYS, VERY GOOD AND PRODUCTIVE CONVERSATIONS,” Trump said in an all-caps Truth Social message. Oil fell 11%.
May 29: “Negotiations with the Islamic Republic of Iran are proceeding nicely!” Trump posted. Oil fell 10% that day.
June 11: “I don’t know if you heard, but we ended the war with Iran today,” Trump said, calling off a large-scale bombing raid, kicking off a four-day, 16% decline in oil prices.
“Groundhog Day, Episode 15,” said Andy Lipow, president of Lipow Oil Associates.
Holding out hope
Despite getting burned for months, the market may have good reason to remain optimistic.
Just six months ago, before the war, the market’s big concern was oversupply: Restless OPEC countries were increasing oil despite relatively low demand, because they were sick of their imposed production caps. The world had a historic amount of crude sitting in storage, and oil producers were supplying 4 million barrels per day more than consumers were using, according to Capital Economics
Then, a month ago, oil rapidly fell below its pre-war price, because the market shockingly found itself in a glut once again. During the war, the world learned to live without 13 million barrels of oil coming through the Strait of Hormuz each day.
A big chunk of those barrels were recovered by rerouting oil across Saudi Arabia to the Red Sea – about 5 million barrels per day, according to Kpler. Iran’s proxies in the region, the Houthis, have since blockaded another strait – the Bab-al-Mandeb – challenging Saudi Arabia’s ability to export oil through that alternate route.
Another significant portion of those 13 million barrels were replaced with emergency stockpiles that Western nations, led by the United States, have been releasing for months. And China, with its massive oil inventory, has been drawing down its reserves and reduced its crude imports by more than 4 million barrels a day, according to JPMorgan.
So when the Strait of Hormuz briefly opened in June for about 3 weeks, and 200 million barrels of oil quickly flooded out of the Persian Gulf for the first time in months, the world, was suddenly awash with oil before it could adjust. Oil prices tumbled.
The fragile peace didn’t hold, but the market’s memory is long enough to remember what was happening in February and in June.
The tipping point
Still, the disconnect between the price of oil and the tightness of the market has rarely been larger.
Oil companies’ crude inventories are dwindling rapidly. That’s most notable in Cushing, Oklahoma, the pipeline crossroads of America, where stockpiles have fallen well below operational stress levels.
The crucial junction, where Texas oil is piped, priced, stored, and piped back out to America’s refineries, has tumbled in recent weeks to 18.6 million barrels, according to the US Energy Information Administration. Anything below 20 million barrels puts added stress on the massive facility’s operations, requiring extra force to push the oil through the pipes.
At some point, all that will be left is the gunk at the bottom of the storage containers, and physics will prevent the oil from flowing through those critical pipelines.
Cushing isn’t alone: Commercial inventories are reaching operational stress levels across the world, holding just about 57 weeks of supply, noted Kieran Tompkins, senior climate and commodities economist at Capital Economics. Global operation stress is considered to be around 55 weeks.
That’s why the oil market may be underpricing that risk, argued Tompkins. When oil reserves have been at these historically low levels, oil prices typically have traded 20% higher.
Without a significant and sustained pick-up in energy flows through the Persian Gulf, the oil market will eventually reach a “tipping point” – a period in which inventories can no longer be drawn down to replace the lost oil supply.
At that tipping point, the only solution is for oil prices to surge, destroying enough demand for oil that the market can return to equilibrium. To get there, oil may need to surpass $150 – well beyond its all-time high.
It could happen in a blink of an eye. But, for now, the market continues to believe Trump that a solution is just around the corner.
The-CNN-Wire
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