How will the Iran deal collapse impact crude prices

With the US choosing to exit the JCPOA deal with Iran, are we set for another substantial move higher for oil prices? 

Oil pump
Source: Bloomberg

US President Donald Trump’s decision to reintroduce sanctions on Iran have thrown a curveball into Middle East relations, with many expecting this to have continued ripples throughout the world and region. The immediate aftermath has seen tensions between Israel and Iran rise in Syria, already leading to one military clash. With the tensions rising in the Middle East, there is no doubt that the market focus will rest on the price of oil, given Iran is the third-largest oil producer in the Organisation of Petroleum Exporting Countries (OPEC). Current crude exports from Iran are around 2.6 million barrels per day; over one million barrels higher than the 1.5 million exported under the sanctions imposed by Barack Obama in 2012.

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Much of the Iran's oil exports head to Asia currently, with over than 1.5 million barrels per day sent to the likes of China, Japan, South Korea, and India. With Japan and South Korea already indicating that they will aim to attain a waiver from the US in order to continue buying Iranian crude, the impact of Trump’s actions will rest on how far he goes in comparison with Obama’s previous sanctions.

However, while the US has left the Joint Comprehensive Plan of Action (JCPOA) agreement, fellow signatories, the UK, Germany, France, Russia and China, have assured that they will stick to the agreement. This creates a situation whereby either Europe will attempt to change the mindset of the US, or they have to withdraw any investments that have been recently made into the Iranian economy. While those nations have vowed to stand by the agreement, there is little likeliness that US allies would side with Iran in this issue.

As such, traders should keep an eye out for exactly what European and Asian allies do following the imposition of sanctions from the US, as this will greatly impact quite how much oil is taken off the market.

Charts wise, there is a clear bullish theme to crude prices, which has been enhanced through this recent decision from the US to exit the JCPOA. Today saw the price of Brent crude hit the highest level since November 2014, and there is likely to be further gains to come. With the break through $70.00 last month, we are in territory with precious few points of resistance to look out for. While we are likely to see some form of pullback soon enough, the bullish outlook for Brent crude would only be negated should the price fall below the February low of $61.66.

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