US-EU showdown over Iran to impact crude prices

The US may have reinstated sanctions on Iranian trade, yet the EU pushback has pointed towards a potential confrontation that will significantly impact the outlook for crude oil. 

Source: Bloomberg

Iran has been at the forefront of investors’ minds this week, with the re-imposition of a raft of sanctions from the US raising questions over the potential market and political impact that this could cause. This week’s reinstatement relates to sanctions that hinder Iran’s ability to trade in key products, from metals such as steel and aluminium, to everyday items such as cars, pistachios and rugs. The measures also limit their ability to buy US dollars and issue sovereign debt. However, while sanctions on the all-important crude market (78% of exports) will only come back on-line on 4 November, this first batch provides a good proxy for those harsher measures.

Key to this is the fact that most other parties within the denuclearisation agreement do not support the US approach, with nations such as Russia, Turkey, China, and the EU all coming out in favour of Iran. This week has seen the EU state that they ‘deeply regret’ the re-imposition of sanctions by the US. Given that the EU currently does around $23 billion worth of business with Iran, it comes as no surprise that they will want to avoid breaking down those ties too easily. However, with US President Donald Trump threatening that ‘anyone doing business with Iran will NOT be doing business with the US’, there is a significant roadblock to any companies continuing to operate in Iran. The choice for a major European firm to decide between operating in the US and Iran will typically be a no brainer, given the size of each market. However, the EU has since told European firms to ignore the US calls to withdraw from Iran, saying that if a European firm exits Iran without authorisation from the European Commission, they could be sued by EU member states. The EU also put into place a mechanism through which European firms can sue the US administration through member states.

All in all, this is a sticky situation for firms operating in Iran, with possible negative repercussions in either circumstance. Crucially, with many European firms being encouraged to invest in Iran following the breakdown in sanctions, any firms shifting operations out of the country would incur costs and a loss of profitability.

Coming at a time when the US and EU had seemingly found common ground following a period of fraught trade negotiations, this battle over the treatment of Iran could have wide-reaching implications. The expectation that the Europeans would simply fall in line has clearly been misplaced, and this issue looks set to remain a bone of contention for some time yet. With Iran representing the third highest Organisation of the Petroleum Exporting Countries (OPEC) crude exporter, the outcome of this conversation will also be translated into the energy markets.

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The price of Brent crude has been drifting lower over the past three months. Despite the recent gains, we have seen a strong move lower today in the wake of a smaller than expected fall in US inventories. This sets us up for a potential bearish engulfing pattern, coming off the back of a 76.4% retracement. While this alludes to a potential continued move lower, markets will be keeping an eye out for any news which alludes to either support or refusal of the US sanctions on Iranian exports.

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