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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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A Geopolitical Red Herring For Oil Markets

Iran oil

A Trump-Macron bromance briefly brought the oil price rally to a halt on Tuesday.

The two leaders hugged and kissed quite a bit during the French President’s visit to Washington, and the oil market took notice when President Trump voiced some “flexibility” regarding a “new deal” with Iran, which took everyone by surprise. French President Emmanuel Macron is pulling out all the stops to convince Trump not to abandon the Iran nuclear deal, including veering from the official EU script by proposing some sort of “new deal.”

Oil prices were rising steadily at the start of trading on Tuesday, but quickly went into reverse after the comments from Macron and Trump. At the start of a meeting, Trump called the Iran deal “terrible,” “insane,” and “ridiculous.”

But after the pleas from Macron not to abandon the deal, Trump sounded more open to the possibility of a new agreement, although, characteristically, he offered a vague reality TV-style cliffhanger. “Nobody knows what I’m going to do on the 12th, although Mr. President, you have a pretty good idea,” Trump said with Macron sitting next to him. “But we’ll see. But we’ll see also if I do what some people expect, whether or not it will be possible to do a new deal with solid foundations.” He also said that some sort of accord between the U.S. and France regarding the Iran deal might not be so tricky. "We could have at least an agreement among ourselves fairly quickly.”

The losses to oil prices after the sudden flexibility from the White House is a clear indication that the oil market has already been pricing in some sort of heightened U.S.-Iran confrontation. Expectations are that the U.S. will scrap the deal and begin to move towards implementing sanctions once again. Related: What Is A ‘Fair’ Price For Oil?

In other words, the longevity of the current oil price rally is predicated on such an outcome. A softer position from the U.S. would likely lead to an end for oil price gains, at least temporarily.

That is especially true since hedge funds and other money managers have built up a record set of bets on rising oil prices. In many ways, investors have never been this bullish on oil futures. There are good reasons why the fundamentals point to higher oil prices – inventories are likely close to the five-year average, OPEC will likely keep the cuts in place, demand is strong and supply is falling in places like Venezuela. But a lot of that sentiment is also based on supply risks to Iranian oil.

Even as the case for higher prices is solid, the lopsided nature of speculative positions in the futures market also exposes oil prices to a price correction. Should sentiment sour investors could quickly begin to liquidate their bullish positions, which would likely lead to a sudden downward correction in prices.

A more conciliatory position from Washington vis-à-vis the Iran nuclear deal would be an obvious candidate to break the bullish sentiment in the oil market.

With all of that said, nothing in Trump’s track record suggests that his comments can be trusted. He routinely suggests he is open to some policy position, often to flatter someone in his presence, only to do the exact opposite at some later date. Moreover, his incoming Secretary of State Mike Pompeo and his national security advisor John Bolton will have his ear as the May 12 deadline approaches. Trump’s warm meeting with President Macron will be ancient history by then.

Perhaps more important than Trump’s mercurial character is the fact that a “new deal” seems prohibitively difficult to achieve. President Macron suggested a four-part “new accord,” which would include an extension of the current restrictions on Iran beyond 2025, a halt to ballistic missile development and some sort of limit on Iran’s geopolitical influence in the region. Such goals are laughably unrealistic for a variety of reasons, not the least of which is that it’s not even clear what they might look like in practice. Moreover, Iran would never sign on to such sweeping restrictions, particularly since they would have nothing to do with the nuclear program in question. Related: Russia Bets Big On Arctic Oil

“You said you’re making decisions with a European leader over a seven-party deal. Who allowed you to?” Iranian President Hassan Rouhani was quoted as saying by state-run Iranian Students News Agency. “First go and respect what you have signed, what your former president and foreign minister have said, then start bringing up new issues.”

He went on to criticize Trump personally. “You don't have any background in politics. You don't have any background in law. You don't have any background on international treaties,” Rouhani said. “How can a tradesman, a merchant, a building constructor, a tower constructor make judgments about international affairs.”

So, while the press ran with headlines of a potential for a “new deal,” such an outcome seems wildly unrealistic. Oil prices fell on the news, but unless more bearish news emerges, the respite could be brief. Oil could still fall due to some other catalyst – renewed stock market turmoil could spook investors and force a liquidation of the net-long bets from speculators, for instance – but the unexpected thaw between the U.S. and Iran probably won’t be it.

By Nick Cunningham of Oilprice.com

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  • Bob on April 25 2018 said:
    Nailed it, Nick.
  • Bill Simpson on April 26 2018 said:
    Trump wants to hurt Iran, mostly in order to protect Israel, and thus keep his largest US donors happy. Some people in the US military want to get even for the roadside bombs coming from Iran during the US occupation of Iraq. Trump will probably pull out of the Iranian deal. But he may wait until after the meeting with Kim Jong un is over, to see how that turns out. (If I were Kim, I wouldn't give up my nukes, unless China told me that I would be blockaded, unless I did. Kim would be stupid to trust Trump. And Kim isn't stupid. Now if Xi told him China has his back, he wouldn't need to keep his nukes. But I suspect Xi told Kim to get rid of them because China has his back. It wouldn't be smart for him to defy China, since they could strangle his economy.)
    If Trump had any sense he would wait until after the November election to pull out of the Iran deal because after he does, the gasoline price in the US will probably go up, as Iranians are able to export less oil, and Venezuelan output continues to decline. Voters won't like higher gasoline prices when they vote in November. Believe it or not, voters blame the person in power for anything bad that happens. It even extends to acts of nature, like floods and even shark attacks!
  • Mamdouh G Salameh on April 26 2018 said:
    You may agree with me, Mr Cunningham, that the decline in oil prices in the last two days has more to do with profit taking and far less to do with the Iran nuclear deal.

    With two hawks on Iran like incoming US Secretary Mike Pompeo and veteran neo-conservative John Bolton as national security advisor having the ear of President Trump, it is very probable he is going to walk away from the Iran nuclear deal on the 12th of May and re-impose sanctions on Iran. Alternatively, he may ask Iran to accept more restrictive measures, something Iran will refuse out of hand.

    Possibly anticipating such requests from Trump, the Iranian President Rouhani went on the offensive criticizing him by saying “How can a tradesman, a merchant, a building constructor, a tower constructor make judgments about international affairs.”

    Still, whether President Trump stays in the Iran deal or walks away from it is irrelevant to the global oil market or prices. The global oil market has already factored in the probability of US withdrawal from the deal. A re-introduction of sanctions on Iran will neither impact on the global oil market nor on oil prices. Iran’s oil exports will not lose a single barrel of oil as a result of the forthcoming sanctions. Moreover, Iran will be pricing its oil exports and paid for its exports by the petro-yuan thus bypassing the petrodollar and also nullifying US sanctions.

    Furthermore, the European Union (EU) is not going to walk away from the Iran nuclear deal and therefore it will not be imposing any sanctions on Iran thus further weakening US sanctions.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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