The USA and the Iran Deal – A Break-Up with Consequences

           Energy Markets

The world is keeping an eye on President Donald Trump and the tensions in the Middle East. This time, the focus is on the US exit from the Iranian nuclear deal.

Sealed back in July 2015, the deal ended the 12-year long standoff of Tehran’s nuclear programme. It was a trade of strict limits in Iran’s nuclear programme in return for an escape from economic sanctions.

The exit caused a stir, and now the consequences are reverberating on commodity markets around the world.

Iran is the third largest producer within OPEC and last month alone exported 2.6 million barrels of crude per day. Asia is the recipient of the majority of Iranian crude with exports to Europe between 500-600 kbpd. Sanctions have yet to be implemented, but on Monday afternoon, the new US Secretary of State Mike Pompeo stated that the new sanctions “will be the strongest sanctions in history”, and once these sanctions come into full force “Iran will be battling to keep its economy alive.” These strong words were accompanied by the release of 12 US demands, which if Tehran cedes to, would result in a new nuclear deal and no sanctions being imposed. Most believe it is highly unlikely that Tehran will accept even 30% of the demands as they are very harsh and there is likely opposition from hardliners within the government and the supreme leader Ali Khamenei.

The imposing of the new sanctions (if no agreement is made) will be staggered, with several in the next 90 days and the reminder no later than 180 days after President Trump first announced America’s withdrawal from the deal. The UK, France, Germany, China, and Russia, who with America agreed on the nuclear deal after 12 years of tough negotiation, released a joint statement immediately after the initial withdrawal announcement broke, vowing to stand by and uphold the agreement. Since that statement, there has been no backtracking from Trump, and last night’s announcement extinguishes any chance of it happening. Furthermore, any country that continues to do business with Iran and contravenes US sanctions will also be subject to sanctions. French energy company Total has already stated they will unwind all operations and pull out of a ~$1bn deal to help develop the South Pars gas field (world’s largest) unless they receive guarantees that any sanctions would be waived. Iranian imports of EU goods totalled €10.25 billion in 2017 while the EU imported €9.5bn worth of goods from Iran. The majority of these deals are now in jeopardy with time running out before round one of the sanctions are implemented.

With that in mind, and the fact that this situation has also impacted the healthy trade between Iran and Qatar, the next 90 days will see the leaders of the UK, France, Germany, China, and Russia try and change Trump’s stance or endeavour to minimise the harshness of the sanctions. This uncertainty will ensure crude prices remain in their current upper ranges with concerns on the effect on global supply, despite OPEC’s ability to replace the potential loss of Iranian crude.

Before the nuclear deal in 2015, sanctions on Iran removed around 1mbpd of Iranian crude from the markets. Saudi Arabia may increase output to compensate. However, Trump’s decision means the OPEC production cut deal now looks dead in the water. Oil currently trades close to 3.5-year highs. Increased tensions and tit-for-tat strikes in Syria between Israel and Iran and the current situation in Gaza are only intensifying the geopolitical risk. US production continues to increase (10.7mbpd last week) and is now forecast to overtake Russia (ca. 12m barrels) in Q3.

The US’s continued increased output may negate some of the geopolitical upside currently present in crude prices, but in the end, the sanctions will play a significant role in future price movement, with downside potential limited.

Wayne Bryan

Wayne has been working in energy for 12 years, moving into consultancy after beginning his career with a major international energy supplier. Wayne holds an MA in International Finance and manages some of Alfa’s corporate flexible client contracts. He is currently responsible for several of Alfa Energy’s publications. He has also appeared in many news media in his capacity as energy analyst, most notably Reuters, Bloomberg, and the BBC, among many others.