John J Hardy
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Article / 01 May 2018 at 8:46 GMT

Iran nuclear deal: A binary event awaits the oil market

Head of Commodity Strategy / Saxo Bank
  • Iran decision puts Trump's domestic and intl. agendas at cross-purposes
  • If he abandons the deal, he risks a spike in global oil prices
  • A decision to keep the deal would deflate oil's built-up risk premium
 The Palais Saxo-Coburg in Vienna where the deal was signed after painstaking deliberation and diplomacy. Source: Mikhail Gnatkovskiy /

By Ole Hansen

US president Donald Trump has until May 12 to make a call on Iran. At stake is the June 14, 2015 deal between Tehran and six world powers (the US, UK, Russia, France, China and Germany) that lifted sanctions against the Islamic Republic in exchange for limits on the Iranian nuclear programme. It is a decision that places aspects of his domestic and international agendas at cross-purposes, and its unresolved status is adding a premium, as well as volatility, to crude oil markets.

If Trump abandons the deal, he risks a spike in global oil prices that could end up being counterproductive given the impact on global growth and inflation. While the other members of the deal remain in favour of its continuation, the reintroduction of US sanctions would hurt Iran's ability to transact in dollars.

Even though Iran does not export any oil to the US, it could on that basis reduce or potentially completely remove European demand for Iranian barrels – just like we witnessed between 2012 and 2015, when Iran was sanctioned.

The US, Israel, and Saudi Arabia view the deal as flawed as it allows Iran to build nuclear weapons following a 10-year moratorium while at the same time giving Tehran the economic power to fund terrorist organisations in Syria, Lebanon and Yemen.

This troika of nations appears to comprise the core of Washington’s Middle Eastern strategy, where the US is currently backing a Saudi-led coalition against Houthi rebels in Yemen while attempting to maintain a presence in Syria so as to prevent Iranian or Iranian-backed activity near its allies’ borders. 

Israel joined the debate yesterday when Prime Minister Benjamin Netanyahu said Iran was lying "big time" after presenting documents which he said proved that Iran ran a programme between 1999 and 2003 to build atomic bombs. While not presenting evidence that Iran was currently violating the terms the timing is seen as a counter to European leaders who led by France's Emmanuel Macron and Germany's Angela Merkel have stepped up their attempts persuade Trump to agree to an amendment instead of abandoning the nuclear deal. As Bloomberg wrote today, "Europe’s response to Netanyahu was to argue that if you don’t trust someone, that’s all the more reason to keep them where you can see them -- in this case, under one of the toughest nuclear-inspection regimes ever imposed."

The lifting of sanctions at the beginning of 2016 helped trigger a one million barrel/day increase in Iranian oil production to 3.8 million b/d. This is the level that Iran agreed to as part of the Opec+ group agreement in 2016 to keep production capped in order to remove the global overhang of supply. A reintroduction of sanctions without seeing other Opec members increase production could remove an estimated 300-500,000 barrels/day of Iranian barrels.

Iran Oil Production

What about Trump's so called base?

While President Trump in a recent tweet accused Opec of keeping oil prices artificially high a potential troubling midterm elections for Trump and the Republicans are looming large within a few months. A sanctions-related spike in oil prices could therefore add further pressure on US motorists, and middle-class voters as a whole, a development that would undercut Trump’s populist appeal.

The national average US gasoline price at the pumps already trades at the highest for this time of year since 2014. Seasonal higher prices are expected during the coming months when the annual summer driving season boosts demand. 

US National Average Gasoline Price

Brent crude, the global benchmark, has benefited greatly from ongoing geopolitical risks, with the US-versus-Iran standoff as well as an ongoing collapse in Venezuelan production attracting most of the attention. On top of this, we have Opec and Russia's continued discipline in keeping production capped while talking up the price towards $80/b.  

Global demand was strong during the first quarter and this, combined with record buying appetite from hedge funds, has helped increased the positive roll yield from holding a long futures position (backwardation). The net-long in the market is by historical standards now very stretched, not least in Brent crude where despite a small reduction last week only one short exists per 20 longs.

Geopolitical risk spikes can be vicious but tend to lack longevity. Unless supply is threatened, such spikes could add extra non-Opec barrels while potentially raising growth and demand risk.
The outcome of the Iranian decision could very well trigger an additional move to the upside as the market would tighten even faster. A decision to keep or attempt to amend the current deal would, however, deflate the built-up risk premium. 

Brent crude has currently got a technical upside target just below $82/b, the 61.8% retracement of the 2014 to 2016 sell-off. But it depends on its ability to hold onto the current non-fundamental risk premium, estimated to be somewhere between $5 and $10. 

Brent Crude oil, first month cont.
 Source: Saxo Bank

– Edited by Clare MacCarthy


Ole Hansen is head of commodity strategy at Saxo Bank

bargee bargee
You always write such good articles.
Ole Hansen Ole Hansen
Thank you very much bargee. Much appreciated
Ole Hansen Ole Hansen
Most of the info revealed during Netanyahu's dramatic presentation was already public knowledge, and was key in shaping the nuclear deal's inspections regime
Ole Hansen Ole Hansen
Brent crude oil is currently stuck in a relative tight range with low volumes seen following yesterday's Netanyahu surge.
Clive Lambert - FuturesTechs Clive Lambert - FuturesTechs
72.75 the key support in Brent...
Ole Hansen Ole Hansen
European buyers of Iranian crude oil. Source: Platts


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