Trump and Iran – what happens to oil?

The possible collapse of the nuclear deal between Iran and other nations could prove to be a major development in the oil rally.

Oil
Source: Bloomberg

Thursday 12 October may be the day when Donald Trump, the US president, takes the first steps towards unravelling the international deal to curb Iran’s nuclear programme. A new US approach would see Washington take a much more hardline view, reinstating sanctions that would require countries to cut back on the proportion of Iranian crude oil that they import.

The president has been looking for an excuse to pull out of the deal, with the White House arguing that Iran has violated the agreement, even though the International Atomic Energy Agency (IAEA) says it has complied. The administration points to Iran’s support for terrorism and its missile testing, both of which are outside the scope of the deal.

However, there may not be that much impact on the oil price should the US fail to recertify the deal as it is required to do every three months. Iran exports around 2.2 million barrels of oil a day (mb/d), from a production of 3.8 mb/d. Asia gets 60% and Europe 40%, thus US sanctions will only have a major effect if other countries join in, which seems unlikely. Thus, while the previous set of sanctions cut Iran’s exports to less than one mb/d, this time around the impact is not likely to be as great.

If the flows are redirected to Asia, with India a likely recipient courtesy of a potential Russian deal to take Iran’s exports and redirect them, then the impact could be limited. However, if Europe falls into line behind the US, due to fears of secondary sanctions, then the oil market could see a greater impact, potentially driving the price higher.

The Iran story comes at an interesting time for oil prices. A breakout from the descending February trendline indicated the strength of a rally that had seen WTI push from a low of nearly $42 in June, to $53 by the end of September. Following this volatility returned to the market in a significant way, with wild swings in price seeing the commodity fall back below the trendline.

However, this stay was even briefer than the spike above it earlier in the month, and a recovery saw the price reclaim $51. Further bullish momentum would see the price head towards the September high of $53, and from there the April high of $54.05 comes into play. A close back below $50 would suggest further weakness, but as can be seen in the daily chart the stochastics are posting another bullish crossover, an even that, so far this year, has led to significant price gains. A US-Iran falling out could provide another bullish catalyst for oil. 

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