Bottom Line: The UK is close to making a thaw between Iran and the West a tangible reality by considering allowing BP to resume work with Iran, and Europe is eyeing this potential Iranian natural gas hungrily. Things are about to change for global energy.
Analysis: Crude oil for November delivery fell on Monday by more than $1 over the previous week, continuing the reduction in anxiety over a potential US strike on Syria, and the overwhelming sense of calm that has come with US and European flirtations with the new Iranian president, which in turn has removed anxiety over perceived threats to the Strait of Hormuz from Iran.
For the UK, sanctions that have suspended operations at the Rhum natural gas field in the North Sea since 2010 have kept the country from at least 5% of its natural gas output, and a thaw with Iran would be a blessing. This joint venture with the National Iranian Oil Co. could now be revived.
Most importantly, US and European sanctions on Iran run contradictory to their shared goal of reducing Europe’s dependence on Russian gas. For this reason, there have been a number of exemptions to sanctions for Iranian-backed energy projects—most notably BP’s giant Shah Deniz gas field in Azerbaijan (10% owned by Iran). This was a strategic move to give Europe some alternative to Russian gas, and there should be more soon.
Also of note in this atmosphere of thaw is an incident in Iran in which the clerical leadership told security hardliners in the Iranian Revolutionary Guards Corps (IRGC) to stay out of politics—or more to the point, to refrain from attempting to block the new moderate government's efforts to resolve the nuclear dispute with the West. There are indications that the IRGC would be rewarded economically (the group controls a significant amount of the economy) for sitting this political battle out.
Recommendation: Things are about to change for global energy in a big way, largely due to a new Iranian president at the helm, Hassan Rouhani. Despite the fact that he doesn’t wield as much control as we would like in the face of the Supreme Leader, Iran has been given a facelift and the West is ready to play ball over oil and gas, over Iran’s nuclear program, and over Syria. Particularly in Europe, but also very much so in India, Iran’s natural gas is already been divvied up—even if only in the mind. For investors, right now keep an eye on BP shares, because we’re talking about a potential multi-billion dollar boost for the company.