Real-Ekonomik: The Iran War's Longevity with Nick Kumleben

Podcast Briefing: an Edited Q&A

The following Q&A has been adapted from the HC Commodities Podcast and edited for clarity and length.

The MOU: Peace Deal or Strategic Pause?

Paul Chapman: Are we to take the cynical view that the June MOU was simply a pause that both sides needed, or was it a genuine attempt at peace?

Nick Kumleben: I think it is fair to describe it as an honest attempt. But to call it a deal probably gives it too much credit. It was more of a meeting agenda.

Of the 14 points, only four required immediate action: the end of the US blockade on Iran, Iran committing to 60 days of free transit through the Strait of Hormuz, the lifting of US sanctions, and the release of frozen assets. The rest were left for future discussions, which in the context of US-Iran relations tends to mean many meetings and very little actually getting agreed.

So the MOU was a long way from being a binding document. What it did do was create a weak foundation for a pause. It helped get oil moving out of the Strait of Hormuz, brought prices down, and allowed inventories to rebuild. Once that economic pressure eased, both the US and Iran became more maximalist in their positions, and we went back to war.

A Placeholder, Not a Peace Settlement

Paul Chapman: Was the MOU a sign that peace was actually close?

Nick Kumleben: It was a placeholder document. It signalled that good-faith negotiations were about to begin, rather than that they were necessarily going to accomplish anything.

That is what points to a much longer timeline for the war than some may have expected from the signing of a nominal deal.

Oil, Sanctions and Iran’s Breathing Room

Paul Chapman: How significant was the unfreezing of assets, and did the MOU effectively give Iran more room to manoeuvre?

Nick Kumleben: The unfreezing of assets is probably the provision the US has failed to comply with. That has been tied up in technical negotiations from day one after the MOU. Iran has not actually received the frozen assets back.

What Iran has been able to do is sell a lot more oil in the weeks after the MOU, and sell it at international prices to willing buyers. That gave Iran a lot more room to work with. If you play out a model of the blockade, it extends the timeline on which Iran can survive. It also gave Iran time, during the ceasefire, to harden military installations and move more assets underground or into bunkers.

China as the Swing Consumer

Paul Chapman: One of the biggest surprises has been how controlled the oil price has remained. What explains that?

Nick Kumleben: China has effectively built a demand-side OPEC. At a time when OPEC is losing some of its primacy on the supply side, China’s ability to act as the swing consumer has been what saved the world from, say, $150 oil or higher.

The numbers are remarkable. June crude imports were down 40 to 45 per cent relative to February, and around 40 per cent year on year compared with June 2025. What is interesting is that, unlike the rest of Asia, where we saw work-from-home mandates and four-day weeks, China has achieved much of this without a major impact on mobility.

Some of it is inventory work-down. Some of it is fuel switching in petrochemicals and road transport. But the broader point is that the price elasticity of demand in the world’s largest oil importer looks much higher going forward. That caps the upside to prices to some degree.

When Markets Trade Headlines

Paul Chapman: Why do markets still react so strongly to political announcements?

Nick Kumleben: A big part of it is what traders and analysts call jawboning: using announcements to bring prices down, even when those announcements do not necessarily reflect the reality on the ground.

The difficulty is that if you believe those statements, and you expect another few weeks of higher flows, then the market reaction can be justified from a barrel-counting perspective. The problem is distinguishing between fact and fiction. That is difficult enough for discretionary traders, and even harder for momentum trading or quantitative strategies.

The Bab al-Mandeb Risk

Paul Chapman: Is the Bab al-Mandeb fully closed?

Nick Kumleben: No. It is not fully closed.

There are two reasons for that. First, the Houthis have not historically been as effective as the Iranians at hitting ships. Secondly, Chinese tankers are being allowed through on a case-by-case basis, as happened in previous attacks on shipping. Chinese and Russian cargoes were allowed through, while Western shipping was more likely to be targeted. That said, it is still a shoe that could drop. Some flows can be rerouted north, but that is logistically difficult.

A Conflict Moving Beyond Borders

Paul Chapman: Are we now seeing the conflict expand beyond Iran, Israel and the US?

Nick Kumleben: Yes. The Houthis and strikes on ships in the Red Sea and Bab al-Mandeb are a really important expansion of the war. That route is one of the key rerouting options for Middle Eastern crude and Saudi crude. If Saudi Arabia cannot move four or five million barrels a day out of Yanbu, then the world has a big problem.

There is also the Ukrainian angle. Ukrainian strikes on Russian infrastructure and on water have affected Russia’s ability to export refined products. That means Russia is sending out more crude, which is useful only if there is refining capacity available elsewhere. It is starting to look more and more global.

The US Economic Dilemma

Paul Chapman: From an economics and commodities standpoint, where is the US leaning?

Nick Kumleben: The war is making life harder for the Fed chairman and the Treasury Secretary, and therefore for the President. If you look at where the oil price and the 10-year yield are, it is a more difficult place for the US than it would be without the war.

There are some beneficiaries. LNG exporters have done very well. But on the oil side, the supply response has been muted. Roughly 20 weeks into the war, US production had increased by around 100,000 barrels a day, according to EIA data. At a similar stage of the Russia-Ukraine war, production was up 400,000 to 500,000 barrels a day. All-out war is still militarily possible, but it is unlikely to be in the US economic interest.

Iran’s Capacity to Endure

Paul Chapman: How much pressure is Iran actually under?

Nick Kumleben: Iran is in a difficult place, given the amount of damage it has taken. There is talk of immense reconstruction funding being needed. But this is also an incredibly resilient regime.

It has been dealing with aggressive US sanctions for nearly a decade, and sanctions more broadly for longer than that. It is skilled in the art of making do. We were more sceptical than most about the blockade’s ability to force change in the near term.

Our view was that the regime could survive somewhere between six and 18 months under blockade, using overland imports, smuggling oil out, and drawing on storage capacity both onshore and floating. The amount of oil Iran moved out in the two or three weeks after the MOU gave it additional breathing room, both in terms of dollars and inventories.

The Limits of Economic Pressure on Israel

Paul Chapman: From an economics perspective, where does Israel sit?

Nick Kumleben: The non-economic factors are weighing more heavily right now. But there is still an economic impact.

Israel is a major energy importer, and the energy price spikes of the past five months do not help the cost-of-living issue. Those increases can be traced back to the Prime Minister, which matters in the context of Israeli politics.

China’s Preference for the Status Quo

Paul Chapman: Between peace, the status quo and all-out war, where does China sit?

Nick Kumleben: China is pretty happy with the status quo, as long as it can continue getting oil through the Bab al-Mandeb and by other means.

China is extremely well stocked in both commercial and strategic reserves. It has released both oil and LNG cargoes when prices have gone higher, which tells you it is not too worried. And in a world where crude prices in China stay low while refined products globally are very high, that is a pretty good place to be for the world’s largest electric vehicle importer.

All-out war is different. China is still importing around six to seven million barrels of oil a day, even after demand destruction. If Iran fully took the Houthis off the leash, it would become harder for China to get the oil it still needs. So the status quo is probably where China is happiest.

Chinese and Russian Support for Iran

Paul Chapman: How much military or economic support is China providing Iran?

Nick Kumleben: There has been quite a bit of support, not just in hardware and goods coming in, but also on the software side.

It is difficult to imagine the Iranian war machine working without Chinese and Russian assistance. The US has pushed back on this to a degree, publicly and in private meetings, but there is certainly assistance, and there is still assistance going on.

Europe’s Energy Security Problem

Paul Chapman: Where does Europe stand in all of this?

Nick Kumleben: Europe is broadly on the peace side. From an energy-security perspective, this is pretty scary, and probably a little scarier than the market is pricing in.

European inventories do not look great, even relative to 2021 and 2022. One of the factors that helped in winter 2022-23 was Asian cargoes being released because of a warm winter in Asia and relatively well-stocked China. That seems less likely this time, given Middle East and LNG flows. So Europe is essentially betting that it can snap up spot cargoes throughout the winter and be all right. There are other issues too, including low river levels in Germany. The tail risks for Europe look material.

Ukraine’s Near-Term Disadvantage

Paul Chapman: How does this conflict affect Ukraine?

Nick Kumleben: In the near term, it is a major negative for Ukraine. It drags away US attention and, to a lesser degree, European attention. Ukraine also starts competing for material, including interceptors and other assets.

It also gave Russia some benefits, at least initially. Russia benefited from the run-up in crude prices we saw in March and from having a new sanctions licence to sell oil on the free market.

Tank Bottom and Physical Market Risk

Paul Chapman: Can you explain tank bottom as a real tail risk?

Nick Kumleben: Operational tank bottom is when you might have 10 or 20 per cent left in the tank, but it is either sludge that is functionally unusable or the tank is designed in such a way, from a logistical or pressure perspective, that you cannot actually get anything out.

It is an inexact science unless you designed the tank yourself. But it is a major risk, because once you hit that point, you start to see physical shortages and logistical systems breaking down. If you play out the current dynamics towards the end of the year, things get more concerning. The risk becomes much more real if the Bab al-Mandeb closes. If those four or five million barrels a day that Saudi Arabia sends through the Red Sea come off the market, the timeline towards a real oil-market crisis gets much shorter.

The Lower Cost of War

Paul Chapman: Is there a broader lesson from Ukraine and this conflict about the changing economics of war?

Nick Kumleben: One thing we have learned from both Ukraine and what we might call Gulf War III is that the cost of war, both in hardware and in the number of humans required to prosecute it, is much lower in the era of drones and UAVs.

If the economic and human cost of war is much lower, that is probably not a good thing for the world. There are a lot of conflicts that may have been deterred by those costs in the past, but which could flare up again in the coming years. Some will be linked to this global dynamic. Others will simply be matters of local importance. But that does keep us up at night.