Renegotiation of US-Iran nuclear deal remains crucial for oil market

The Biden administration took office with the firm intention of reversing many of the policies implemented by its predecessor. The return of the United States to the 2015 agreement limiting Iran’s nuclear activities in return for economic sanctions relief is at the top of this list. A nuclear deal would mark the return of Iranian oil to the international market, leading to price caps as global supply increases. However, in the short term, neither country wants to take the first step.

In 2018, Donald Trump pulled the United States out of the nuclear deal with Iran, officially the Joint Comprehensive Plan of Action (JCPOA), arguing that he could force the country to abandon its nuclear program through more sanctions. severe. The former US president has targeted the ability of Iranian banks to conduct international transactions and blacklisted the country’s central bank as well as its national oil company.

Since the Islamic Revolution of 1979, the United States has consistently imposed sanctions on the Iranian economy. The first sanctions targeting Iran’s nuclear program date back to 1995, and were decided upon following a United Nations resolution aimed at preventing the country from manufacturing atomic weapons.

For the Iranians, sanctions banning trade and financial transactions have caused consumer prices to rise, compromised the safety of the country’s civilian airlines, and reduced the supply of medical equipment and treatment. But Washington had not anticipated one of the side effects of the 2018 sanctions. Restrictions on access to international currencies imposed on Iranians created a market for cryptocurrency mining that saturated Iran’s power grid and led to blackouts. current. In response, President Hassan Rouhani temporarily suspended cryptocurrency mining nationally until September 22, 2021.

Lack of compliance

On February 23, the Iranian authorities warned the intergovernmental body in charge of monitoring nuclear activities, the International Atomic Energy Agency (IAEA), that the country would no longer comply with the JCPOA and began to restrict controls. Iran says its uranium enrichment program is for peaceful purposes.

On the eve of the resumption of negotiations last week in Vienna, the IAEA expressed concerns. The lack of transparency, access and responses “seriously affects the agency’s ability to provide assurances as to the peaceful nature of Iran’s nuclear program,” the IAEA wrote.

Since February, Iran has produced 60% enriched uranium, close to the purity needed to make nuclear weapons, according to an IAEA report. Uranium indicating a concentration of 3 or 4% of the fissile isotope 235U can be used to fuel nuclear power plants. Uranium usable for military purposes must be 90% enriched. Since Donald Trump withdrew the United States from the deal in May 2018, Iran’s 5% enriched uranium reserves have more than doubled.

The Vienna Iran nuclear negotiations ended on June 2 with a pledge from diplomats to return this week for a sixth and final round. According to Enrique Mora, chief negotiator of the European Union, the United States and Iran must make “difficult decisions” which could prove very unpopular at the national level.

Accidents or sabotage

The talks come as tensions over Iran’s uranium enrichment program have escalated. Iran has accused Israel of a series of initiatives aimed at sabotaging its program. This includes the assassination of scientists working on the project including, most recently, Iran’s leading nuclear physicist, Mohsen Fakhrizadeh, in November 2020. Since the United States pledged to renegotiate the nuclear deal with Iran, Israel and Iran have accused each other of a series of incidents. The latest, that which occurred on June 2 when the largest vessel of the Iranian navy in terms of tonnage caught fire and sank in the Gulf of Oman. On the same day, a fire broke out at a government oil refinery south of Tehran.

Any solution is complicated by politics in the Middle East. Israel has opposed the lifting of sanctions against Iran, as long as an agreement covering both arms and support for conflicts by adversaries interposed in the region has not been reached. In the meantime, Israel is going through its own political storm. Prime Minister Benjamin Netanyahu was challenged last week after fifteen years in office, part of which has not stopped since 2009. A coalition comprising nationalists and parts of the Arab minority has formed with only one thing in common their opposition to Mr. Netanyahu. As of this writing, the coalition is working on forming a government and parliament could vote on June 9, according to its chairman.

The presidential election window

The United States has a short-term incentive to get results. On June 18, the Iranians will elect a new president at the end of Hassan Rouhani’s two terms. Iranian electoral authorities announced seven candidates for election from a list of 592 candidates. The list, approved at the end of May by Supreme Leader Ayatollah Ali Khamenei, indicates that the next president is likely to be a hard-line supporter, opposed to a nuclear deal and any new engagement with the West.

The main candidate, Ebrahim Raisi, is a cleric and current head of the country’s judiciary. According to Iranian news agency Fars, Mr. Raisi enjoys the support of nearly three quarters of citizens who will go to the polls.

However, polls seem to indicate that a choice limited to hard-line supporters will result in low turnout. Almost a third of Iran’s 59 million voters say they do not intend to vote.

Additional barrels

International oil markets are paying close attention to the prospect of an upturn in Iranian exports. It is estimated that 1.5 to 2 million barrels per day (bpd) of Iranian crude is excluded from the market due to the sanctions. If these were to be lifted, Iran would be able to supply the oil market between 0.5 and 1 million bpd.

Last week, the Organization of the Petroleum Exporting Countries and its allies (OPEC +) agreed to maintain their strategy of increasing supply until July. A year after the cartel made a record 9.7 million bpd cut in response to crippling global economies, producing nations collectively decided to increase supply by more than 2 million bpd over the next three month. Brent crude prices hit $ 72.22 per barrel, their highest level in more than two years, bringing the rise to 27% this year.

With OPEC + which retains reserve capacities, Russia which has not recovered its pre-pandemic production levels and the American shale industry focused on improving balance sheets, which would potentially allow it to increase its production more late in the year, the world is not at risk of a physical oil shortage.

All of these factors limiting price increases, credit and equity-linked assets, as well as the currencies of oil-exporting countries, are expected to benefit from current prices.

The risk to this scenario is that competing interests within OPEC + will be exacerbated by Iran’s unilateral return to international oil markets. Iran is already exporting some production, albeit in a discreet fashion. Indeed, commodity data provider S&P Global Platts estimates that Iran has bypassed US sanctions by exporting between 400,000 and 900,000 barrels of crude a day to China this year.

OPEC + members appear to be coping with the price hike and do not expect U.S. shale oil production – or Iranian oil – to return to international markets in the very near future. The cartel’s policy is to react to market demand rather than anticipate changes, which could trigger a short-lived take-off in oil prices.

“There will always be a good amount of supply to meet demand, but we will have to see the demand before you see the supply,” Saudi Energy Minister Prince Abdulaziz bin said on June 3. Salman.

Given the large reserves and excess capacity of OPEC +, any further sustained rise in oil prices appears limited. Prices are supported by market expectations for increased demand as economies reopen. Investors’ fears about inflation are also prompting them to support oil prices as a hedge. We are counting on a Brent price of between 60 and 70 USD per barrel over a twelve-month horizon.