- April 22 talks could either extend negotiations or trigger renewed war, with deep divisions inside Iran complicating a deal.
- Continued talks mean blockades and pressure persist but Hormuz may reopen; failure could spark full conflict, wider attacks, and severe supply disruption.
- A prolonged shutdown of Hormuz could push prices toward $200 per barrel, forcing demand destruction and hitting the global economy hard.
This week brings with it the 22 April deadline marking the end of the two-week ceasefire between the U.S. and Iran. The on-again/off-again/on-again closure of the Strait of Hormuz by Tehran, and Washington’s naval blockade specifically on Iranian ports, can broadly be seen as part of the ongoing negotiations for peace that began on 8 April, with the mood surrounding the talks having swung as wildly on both sides as the state of the blockades. Even before the recent spate of hostilities, mediating Omani Foreign Minister Badr Al-Busaidi declared that an “historic breakthrough” between the U.S. and Iran had been reached, with Iranian Foreign Minister Abbas Araghchi underlining the positive progress. And U.S. President Donald Trump said just a few days ago that the two sides were on the cusp of a deal. That said, a senior European Union (E.U.) security source exclusively told OilPrice.com last week that there are serious rifts between Iran’s Foreign Ministry and the Islamic Revolutionary Guards Corps (IRGC), with the latter far less willing to make key concessions than the former. And Trump has since stated that if a deal is not signed by the Wednesday, 22 April deadline, he “maybe won’t extend” the ceasefire and the U.S. will have to “start dropping bombs again”. In that case, another deadline will come into focus: 1 May is the legal deadline for President Trump to seek congressional approval to continue military operations under the ‘War Powers Act’, following the 60-day mark on 29 April. So, what are the likely scenarios here?
One possible outcome is that no deal is reached by midweek, but the ceasefire is extended to allow for further negotiations. In this event, the E.U. source and a senior Washington-based legal source who works closely with the U.S. Treasury Department exclusively told OilPrice.com last week, the U.S. is likely to maintain a holding pattern on action. This will consist of continuing with its own blockade on Iranian ports, while further reinforcing its position off the south coast of Iran, with the USS George H.W. Bush aircraft carrier en route to the area, having rounded the Cape of Good Hope very recently. Added to the U.S.’s other materiel nearby, Washington should have little practical trouble in continuing its blockade of Iran if its keeps doing so at a distance. “The guys [U.S. navy and other forces] can do everything they need to monitor and enforce the Iran blockade from the Arabian Sea, which is all they need to do to make Iran start to feel the economic pain of the closure,” said the Washington source. “To the same end, we’ve also decided not to renew a 30-day sanctions waiver for Iranian oil exports [that expired on 19 April], and we’re further extending financial sanctions on it too,” he added. “Both of these measures will also put more pressure on China, which has gotten a lot of its oil from Iran over the years [on the terms of the Comprehensive ‘25-year China-Iran Strategic Partnership’], and which up until our blockade of the [Iranian] ports was freely able to keep receiving it,” he added. In this scenario — with blockades in place but talks still ongoing — the E.U. source underlined that it would be highly likely that the U.S. would facilitate the full opening of the Strait of Hormuz sooner rather than later to alleviate further spikes in energy prices.
A less optimistic scenario is that no deal is reached by midweek, the ceasefire is not extended, and the U.S./Israel-Iran war resumes in full. “From the Iranian side, it would include the continued closure of the Strait of Hormuz, the same for the Bab-el-Mandeb Strait, attacks on the critical energy infrastructure of Saudi Arabia, the UAE, Qatar, and Bahrain, attacks on key U.S. military and civilian targets in the region, and later attacks on key targets in the U.S., Israel, and in any countries associated with the U.S./Israel attacks,” said the E.U. source. “If it [Iran] goes down this route then we’d be looking at the bigger options from our side,” said the Washington source. “This includes the sort of infrastructure targeting the President referred to recently [including key bridges and civilian power plants], further targeted special military operations, and more sanctions, all designed to increase pressure on the current regime from inside and out,” he underlined. This scenario would be the one in which oil prices could easily go to the $200 per barrel level promised by Iran in the early stages of the war. Houston-based Vikas Dwivedi, global energy strategist at Macquarie Group, has assessed the possible impact of the war continuing until the end of June. “If the Strait [of Hormuz] were to stay closed for an extended period, prices would need to move high enough to destroy an historically large amount of global oil demand, with some countries, particularly in Asia, already facing physical shortages,” he underlined. “And with the global economy much less oil intensive than 50 years ago, we would not be surprised if that would require historically high real prices — over $200 per barrel — for a time, which would equate to a U.S. gasoline price of around $7 per gallon,” he concluded.
Such a scenario would be extremely negative for the U.S. and politically disastrous for Trump, as fully analysed in my latest book on the new global oil market order. Historical data highlights that every $10 pb change in the oil price results in around a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent per gallon that the average price of gasoline rises, more than $1 billion or so per year in consumer spending is lost — causing economic damage. Politically speaking, since 1896 the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only once out of seven occasions. Trump may still seek another term as President, but even if he does not, he does not want his political legacy to be defined by a failed Iran adventure as was Jimmy Carter’s, according to the Washington source. And, in any event, his Republican Party will want to optimise their chances for another of their members to be in the top job, which means keeping gasoline prices — and therefore, oil prices — at the low end.
All this points to a deal being made at some point sooner rather than later, according to both the U.S. and E.U. sources, but what will it look like? Early in the conflict, Trump clearly laid out the four objectives he wants to achieve with the U.S.’s current actions against Iran and its proxies. In the order in which he said them, they started with making it impossible for Iran to build a nuclear arsenal and then moved on to degrading and destroying its missile stockpiles and production capabilities. Then came regime change and finally the end of the financing and arming of its proxies. All these aims were endorsed by every member of his cabinet. Moreover, all of them were in the draft of President Barack Obama’s original version of the ‘Joint Comprehensive Plan of Action’ (JCPOA, or colloquially ‘the nuclear deal’) agreed with Iran between 2013 and 2015, also detailed in full in my latest book on the new global oil market order. They remained the same in the version of the JCPOA that Trump and his team have been trying to negotiate with Iran ever since the U.S. unilaterally withdrew from the agreement in May 2018.
In terms of specifics, says the E.U. source, progress has been made on the key nuclear issue. “Iran has already agreed to a suspension if its uranium enrichment in principle, with the only difference being the duration — five years against the 20-years now proposed as a minimum by Washington,” he told OilPrice.com over the weekend. “Iran has also agreed to dispose of its stockpile of enriched uranium in principle, with the only difference to the U.S. being that it wants to do so itself, whereas Washington wants the material handed over to it,” he added. “There is also agreement from Iran that it will in principle reduce its support for its proxies across the region, although in practical terms its ability to meaningfully support them for the foreseeable future looks very limited anyway,” he told OilPrice.com. “As of now, there’s not much movement on the issue of curtailing its ballistic missile resources, but there may soon be enough for Trump to extend the deadline for the negotiations further,” he concluded.
