US, Europe, Iran, oil price – another dilemma

US President Trump yesterday announced the unilateral withdrawal of the US from the Joint Comprehensive Plan of Action (JCPOA) approved by the United Nations, that the P5+1 states (US, China, Russia, France UK and Germany) had agreed with Iran in 2015 after marathon negotiations lasting around two and half years.

With yesterday’s decision, Donald Trump has realised his announcement of October that he would revoke the action plan unless the multilateral set of agreements was substantially toughened by the start of May.

During the 2016 presidential election campaign, the US president had referred to the nuclear deal as “the worst deal ever negotiated”, because it

(a) allows Iran to gradually return to producing highly-enriched (and therefore weapons-grade) uranium from 2025 onwards,

(b) does not keep Iran’s ballistic missile programme under observation and

(c) does not grant the International Atomic Energy Organisation (IAEO), which is charged with monitoring Iran’s compliance with the agreement, sufficient supervision rights (especially for military facilities).

As expected, the US withdrawal goes hand in hand with the reintroduction of economic sanctions against Iran (which had only been suspended up to now) that are expected to come into effect in full again over 90 to 180 days. Not surprisingly, Israel and Saudi Arabia praised the US president’s decision, while the snubbed allies expressed their regret about his decision to pull out (Europe) or criticised the move with harsh words (China, Russia).

 

What is going to happen next with the nuclear deal case?

With yesterday’s decision to pull out of the deal, the US president has added another uncertainty factor to an already fragile security situation in the Middle East and therefore did not exactly solidify the thin ice of trade policy issues on which the global economy is currently skating.

Although Europe, China, Russia and even Iran declared their intentions to remain in the nuclear deal for now, it is by no means certain that this political construction is destined to last, especially if the US steps up pressure on the remaining parties by means of secondary sanctions. In this respect, China and Russia appear considerably more resistant to pressure than Europe. This means that – also with regard to the trade conflict instigated by the US and that is as yet unresolved – a decision will gradually have to be made whether one bows to the will of the US (as so often in the past) or if the strength can be found within closed ranks to become an independent “peace envoy” at the centre of a new deal. The door for such negotiations is still open for at least 90 to 180 days and it is urgent for Europe to call for an assembly on this matter. A common stance taken by the European countries on the Iran issue as well as on the trade conflict would weaken the USA’s position overall. Nonetheless, political uncertainty will remain great in any event and is expected to continue to have an adverse effect on the investment appetite of the corporate sector. There is also a risk that the political unpredictability of the US will further weaken international trade relations, which would no doubt be at the expense of economic momentum in the medium term.

 

What effect are the latest developments having on the crude oil market?

As we can see from the muted price reactions, the American announcement did not really surprise the crude oil market. Although a price increase was clearly expected in the wake of the decision date, two questions in particular will decide on whether it will endure:

To what extent will Iranian crude oil exports fall as a result of the sanctions? And will an alternative supplier make up for the fall with replacement supplies?

As regards the first question, we expect export losses of 0.3-0.4 million barrels per day during the second half of the year. This is clearly relevant especially given the somewhat tense situation in the crude oil markets at present. However, it is much less of a concern than in 2012 when multilateral sanctions drove down exports by up to 1.5 mbd.

As far as the second question is concerned, there are clear signs that OPEC (in other words: Saudi Arabia) is ready to step in as a potent replacement supplier. Given the output cuts agreed within the scope of the OPEC/NOPEC initiative, Riad has a “spontaneous reserve capacity” of at least 1.6 mbd (as much as ≥2.2 mbd if Kuwait comes on board) that is available immediately. If the Iranian loss of exports extends into 2019, which is quite probable, even the US itself could be viewed as “contingency insurance”. In the media shadow of the “Trump announcement”, the US Energy Information Administration also raised its forecast yesterday for crude oil production from 11.44 to 11.89 mbd in 2019.

Regardless of the new Iran upheaval, we continue to see the current crude oil price rally of >USD 75 as temporary and expect to see the price of “black gold” receding again to USD 65-70 per barrel during the second half of the year.

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