Sunday 27 May 2018
 
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ANALYSIS

Trump’s Iran deal pullout could hit more than just oil

LONDON, 17 days ago

US President Donald Trump’s decision to pull out of the Iranian nuclear deal could have much larger widespread implications than only an increase in the oil price, said a leading London-based market analyst.

His decision would not only increase Iranian ambitions to become a nuclear power, but also damages the US relationship with its allies. France, Germany and the UK - all implored Trump to remain in the landmark deal forged under Barack Obama’s administration, added Naeem Aslam, chief market analyst at Think Markets UK Ltd.

The French president has already shown his frustration by saying that all the three allies regret the US decision to leave the JCPOA.

“Trump is pushing the limits of his allies’ restraint. They are already sour over recent trade tariffs, and you can only ruffle feathers for so long before there is pushback. When the trade tariffs (25 per cent on foreign steel and 10 per cent on foreign aluminium) were introduced, the European Commissioner, Jean Claude Juncker gave a strong response and warned the US, in so many words, to stop pushing it before European patience ran out,” said Aslam.

Iran has an important role to play here: it is the third biggest oil producer of Opec cartel, and leading up to this event, we have witnessed panic amidst traders who pushed the price of oil higher. Opec members had to work day and night to balance the supply and demand equation, and it is under threat now because other nations in Opec could use this situation as an excuse to produce higher quantity than they should be producing.

Russia, China, Turkey and EU

Currently, Iran's oil production stands at 4 million barrels per day. The country’s production took a nose dive from 3.8 million barrels per day in April 2010, to 2.5 million in May 2013 due to US and European sanctions.

“This time we are unlikely to have that effect, as only US sanctions are presently likely to be restored. A mammoth amount of oil exports finds its way to countries like China, India, Korea, Turkey, and Europe where Iran has strong relationships. China, Russia and Turkey all have not only strong ties with Iran and continue to respect its compliance with the nuclear agreement; the EU is on the same page when it comes to this argument. Therefore, the prospects of cast supply cut are next to none,” Aslam said.
 
However, Trump vowed yesterday that he will institute even stronger economic sanctions on Iran and if the full force of previous sanctions is brought to bear it would make it incredibly difficult for companies to stay in business with Tehran. Iran’s aim was to raise $200 billion of investment to help its energy sector, but due to the continued pressure from Trump administration, oil firms have been very slow and wary in conducting business in Iran.

Out of all the oil companies, it was a French company - Total SA - which returned to Iran with meaningful investment. Although, with the current situation, Russian oil companies could benefit from the situation and build their presence in a more prominent way.  Hence, the equation of oil production for Iran is a little unknown here.

 Spare capacity

Iranian oil production is bound to go down under the current situation and questions remain over which country would use its spare capacity to make up for the shortfall. Opec has curbed its production to 1.8 million barrels per day.

“Let's say that Iran’s oil production does go down by half a million barrel per day, which would impact the price more positively – so, even with lower production, Iran may not be in such a bad position because of the higher oil price,” said Aslam.

“Most importantly, Iran learned how to work with sanctions and the country is in a much stronger position politically and economically to work with other major players in the region to find a solution which fits all. Hence, there may be no point in becoming a massive bull on oil (I do not see any bigger impact on the oil supply), or hold a massive bearish position on Iranian currency or the equity market.” – TradeArabia News Service




Tags: Opec | Nuclear | oil price | Trump | Iran deal |

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