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Watching the US House pass a $95 billion “aid package” for Ukraine, Israel and Taiwan (360-58) reminded me of a comment attributed to Russian-born American author Alice O’ Connor, better known by her pen name Ayn Rand.

“You can ignore reality, but you can’t ignore the consequences of ignoring reality”, she famously said when she developed her philosophical system of Objectivism.

The House also set new restrictions in motion against Iran’s energy sector over the weekend, broadening sanctions to include foreign ports, vessels and refineries that knowingly process or ship Iranian crude in violation of existing US rules, according to Bloomberg.

It would also expand what are called secondary sanctions to “cover transactions between Chinese financial institutions and restricted Iranian banks used to purchase petroleum and oil-delivered products”.

Yet Brent opened the week with a near 2pc fall on Monday as the market simply rubbished the possibility of the Biden White House doing anything – even its favourite pastime of slapping more sanctions on Iran – that might carry even the slightest risk of sending oil prices higher in an election year.

Already the sharp turn in US equities, three straight weeks of declines in the S&P 500 and Nasdaq, the spike in Treasury yields, and the new reality of a rampaging dollar have taken the wind out of dovish bets at the Federal Reserve. And with retail sales and inflation numbers still beating expectations to the upside, chances of a rate cut in May are now very slim – with 4-5 cuts this year, considered all but guaranteed till very recently, out of the question now.

The rush to cap geopolitical risk premium and keep Brent from racing past $90/barrel also puts into perspective market chatter about Washington possibly defanging the recent Israeli response – to Iran’s response to Israel’s initial provocation that desperately tried to spark a wider regional war. Because, while it was practically impossible to forecast how that war would turn out, two things were certain.

One, Iran would retaliate very strongly, regardless of the consequences, if Israel hit hard again, especially if it tried to take out more Pasdaran commanders. And two, oil would rally strongly and definitely hit 100, with market analysts not ruling out a more to 140-150 if the US was also drawn in, which is what Tel Aviv was counting on when it bombed Iran’s embassy in Damascus. For ordinary Americans, that would have meant a further squeeze on household liquidity just because of Biden’s blind support for Israel’s antics; that too in an election year.

Besides, almost 80pc of Iran’s roughly 1.5m barrels of daily exports go to China, and most of it to independent refineries, which are outside the US financial system. It will, therefore, be difficult for Washington to enforce its sanctions on those plants, so it’s unlikely to meet its goal of hurting Iran even though it will still add more volatility to crude and jack up market price – which, if anything, will play into the hands of oil exporters like the Islamic Republic.

That’s exactly what prompted Amrita Sen, noted analyst and co-founder and director of research at Energy Aspects, to tell Bloomberg TV recently that “all sanctions are sanctions on paper but with anything that remotely causes oil prices to go up, I just don’t see myself believing that they’re going to enforce it strongly”.

“What I really want to highlight is this is a US election year, so let’s not kid ourselves”.

Biden can ignore reality and back the Israeli narrative as much as he wants. But he cannot ignore its consequences, especially as hot inflation numbers do his falling ratings no favours at all.

Copyright Business Recorder, 2024

Comments

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ZH Hashmi Apr 25, 2024 08:59am
very apt analysis of current situation , I liked the statement, “You can ignore reality, but you can’t ignore the consequences of ignoring reality”. In the end it is all politics & election matters.
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KU Apr 25, 2024 01:27pm
Like proverbial "agriculture is the backbone of Pakistan", our sovereignty too is dictated by the West, n why not when our leader's assets n nationality is at stake. Pathetic n shameful.
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Az_Iz Apr 25, 2024 05:02pm
Sensible.
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