The price of crude oil has drifted a little lower this morning after hitting its highest level since 2014 last night on fears that the US are about to pull out of their nuclear deal with Iran. Brent crude hit a high above $76 a barrel on Monday evening, representing a gain of more than 20% in the last 3 months, and we could well see an $80 handle in the not too distant future if the Iranian deal is terminated and sanctions reimposed.
Traders await Trump announcement
There has been a couple of rather bizarre developments in the last 24 hours as we approach the May 12th deadline for the US administration to decide whether to keep supporting the landmark 2015 nuclear deal or reimpose sanctions on Iran. Britain's’ foreign minister, Boris Johnson, appeared on Fox & Friends (a believed favourite show of Trump’s) to give an interview on the Iranian deal in what seemed like a last-ditch effort to persuade the president not to pull out. Whether the appearance caught the attention of Trump or not, he took to Twitter shortly afterwards to declare that an announcement on the deal would be delivered at 2PM ET (7PM BST) today.
Geopolitical risk outweighs OPEC actions
From a market perspective, fears that the US will pull out the deal and reintroduce sanctions on Iran can be most keenly felt in the in price of crude. This is really a supply-side story with sanctions previously imposed on Iran back in 2012 cutting the country’s crude oil exports by 2.5m barrels per day (bpd) to a little over 1m bpd. The years since then have seen a fairly notable de-escalation of tensions between Tehran and the West which has allowed Iranian production to move back near 4m bpd - with plans afoot to ramp this up even further and closer to 5m bpd.
Should we see similar sanctions to those announced back in 2012 then around 3m bpd of production could come off the market, providing a pretty severe supply shock which may send prices ripping higher. To put this in perspective the current deal between OPEC, Russia and nine other global producers amounts to a cut of around 1.8m bpd - far less than the cut that we could possibly see if Iranian sanctions are re-implemented. Having said that, the most likely outcome will probably see Trump toe a more diplomatic line, in the attempt to strike a new deal on more favourable terms. In a similar vein to the approach adopted with the steel and aluminium tariffs, the president is likely engaging in a game of brinkmanship to achieve his desired outcome. However the stakes here are far higher!