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Quick Thought Of The Week: Sanctions

Sanctions only work if everyone chooses to obey. It only takes one country to break ranks for the sanctions to lose their effect. And if that country should be a heavyweight economy, then sanctions have as much chance as a snowball in hell.

America has threatened sanctions on any country that imports Iranian oil. So, any country that buys oil from Iran could be penalised by America….

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…. What’s more, banks that facilitate transactions relating to Iranian oil could face crippling fines or even the loss of their US banking licence. It is unlikely any bank would take that sort of risk.

The ban on Iranian oil, which accounts for over three million barrels of crude production a day, has sent crude prices soaring. It is now over $70 a barrel.

But it is unlikely that every country will obey America’s wishes. It has hard to see why China, which is already engaged in a bitter trade dispute with America, would want to kowtow to the Trump administration’s commands….

…. And what could America do about it if China is defiant? It’s not as though the US and China are the best of friends.

There’s something else. One barrel of the black stuff looks pretty much like another barrel of crude. What could stop China from re-exporting any Iranian crude that it might not require. So, Iranian crude could find its way to market through the back door in spite of the sanctions.

News of the surprise sanctions, or more correctly, the end of waivers for Iran’s eight biggest crude buyers, has lifted oil prices. That could be good news for explorers, drillers and integrated oil companies.

But oil prices are unlikely to remain at these elevated levels, unless global economic activity picks up significantly. And that would hinge on a successful outcome of the Sino-US trade negotiations.

Whilst many of us would welcome a breakthrough in the trade talks, I am not holding my breath.

A version of this article first appeared in Stock Advisor.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.