Crude oil prices are declining slightly today by around 1%, with West Texas Intermediate crude still holding above $103 and $110 a barrel.
Oil prices remain high following Donald Trump’s diplomatic manoeuvre on his social media platform, where he said he would delay a planned attack on Iran.
However, the lack of a near-term path to a deal to end the war, stalled diplomatic efforts, and the fact that all sides remain committed to their extreme demands mean that geopolitical risk premiums remain baked into the price, keeping the upward trend intact.
Trump stated on Truth Social that he had ordered a delay of the soon-scheduled attack, following requests from leaders in Gulf nations to allow more time for negotiations.
In reality, the negotiation path is ineffective under the current circumstances. The appointment of a new, hardline leadership within the Iranian hierarchy has made negotiations even tougher than before, with the leadership sticking firmly to its maximalist demands regarding its nuclear and missile programs, as well as control over the Strait of Hormuz.
Given this inflexibility, the most that could be achieved would be a deal similar to the one reached during the Obama administration. For the Trump administration, returning to such a deal would be humiliating, as they did nothing but dismantle the previous nuclear deal and withdraw from it only to end up right back where they started.
Therefore, I see yesterday’s manoeuvre by Trump as nothing more than an attempt to force energy prices down or to buy time to secure some kind of concession from Iran, which I find unlikely given the current hardline leadership.
In this regard, we are left with only the option of a military action, which may require much more extensive action than before. For such an operation to be successful, Seth Cropsey, president of the Yorktown Institute, argued in a Wall Street Journal opinion piece that it would require wide-ranging military action against Iranian infrastructure, including industrial, communications, and other infrastructure, as well as expanded strikes on military targets. This would be in addition to the massive ground operation required to seize Iran’s enriched uranium buried beneath the mountains, which is necessary to achieve one of the primary war goals that the U.S. has failed to reach thus far.
Based on the narrative that diplomacy has stalled and that a deal similar to the previous nuclear agreement is nearly impossible, escalation remains likely to return sooner or later. This keeps the door open to the risk of expanded strikes against energy infrastructure in the Middle East. The recent targeting of the Barakah nuclear power plant in the UAE demonstrates that energy facilities in the region are no longer considered off-limits. This, in turn, will likely maintain the upward momentum in oil prices for a long time, making them more resilient to the maneuvers Trump uses on his social media platform to force prices down and limit political costs. Furthermore, the fact that global oil stockpiles are being drawn down at an unprecedented rate, combined with the lack of faith in a potential deal, prevents any sustained drop in prices.
On the other hand, the one factor that might force oil prices to gradually drop is the reality that the U.S. is suffering from a fundamental shortage in many vital, high-end munitions, both offensive and defensive, combined with the approach of the midterm elections. This might force the U.S. administration to reach an agreement to end the war or withdraw. In that event, Donald Trump may try to repackage that agreement as a victory through his public relations machine.
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