Oil markets brace for Trump to kill Iran deal

The Iran nuclear deal may be doomed, at least if you believe the global oil market....

Posted: May 2, 2018 2:19 PM
Updated: May 2, 2018 2:19 PM

The Iran nuclear deal may be doomed, at least if you believe the global oil market.

Oil prices have surged partly because of mounting expectations that President Trump will kill the 2015 agreement, which allowed Iran to export more crude. Trump must decide by May 12 whether to re-impose sanctions on the OPEC nation.

Brent crude, the global benchmark, briefly soared above $75 a barrel on Monday after Israel leveled new nuclear allegations against Iran.

Bringing back sanctions on Iran could knock out as much as 1 million barrels per day of crude supply, dealing a blow to increasingly fragile energy markets.

"There will be a significant disruption," said Michael Wittner, global head of oil research at Societe Generale.

"The market is assuming that oil sanctions will snap back onto Iran," he said.

Trump said on Monday that Israeli Prime Minister Benjamin Netanyahu's speech on Iran helps show he's "100% right" about the Iranian nuclear agreement, which was signed by former President Barack Obama.

"We'll see what happens," Trump said about his decision on the Iran deal. "I'm not telling you what I'm doing, but a lot of people think they know."

Related: Iran deal: Who loses if Trump brings back sanctions

The oil market certainly thinks it knows. The price of Brent crude has soared 7% this year, and the US benchmark has soared 8% to nearly $69 a barrel for the first time since late 2014. Oil prices have been lifted by concerns about the fate of the Iran deal as well as strong demand and supply cuts by OPEC and Russia.

"The Iranian nuclear deal is dead in the water and a Trump torpedo is fast approaching," Stephen Brennock, oil analyst at brokerage firm PVM Oil Associates, wrote to clients late last week.

Under the deal, Iran agreed to limits on its nuclear activities, including bans on enrichment at key facilities. In exchange, sanctions were lifted in early 2016, freeing Iran to quickly boost its oil production by about 1 million barrels per day. Iran found eager customers for its crude in Europe, Japan, India and South Korea.

It's "now looking increasingly likely" that Trump will not renew the waiver on Iranian sanctions by May 12, according to energy research firm FGE.

Up to 1 million barrels at risk

If the sanctions are restored, FGE estimates that Iran's output could be slashed by 250,000 to 500,000 barrels per day by the end of 2018. That figure would rise to 500,000 to 1 million per day through 2019.

But energy analysts are not certain that all of Iran's oil production growth is at risk. That's because France and other countries are urging Trump not to kill the nuclear deal.

While the European Union put a 100% embargo on Iranian crude oil imports when sanctions were imposed in 2012, Wittner doesn't think the EU will necessarily go along if Trump restores sanctions.

Likewise, China has a voracious appetite for oil and may not wish to do Trump any favors in the midst of its trade spat with the United States, Wittner said.

Other American allies, including India, Japan and South Korea, are expected to cut Iran off.

Will prices spike?

Even though imposing sanctions on Iran would disrupt the oil market, the price impact may not be that dramatic considering how far prices have already risen.

"I don't think you should expect an acute spike given the fact that it's already been pretty well telegraphed," said Brian Kessens, a portfolio manager at energy investment firm Tortoise Capital.

Wittner said that about half of the impact from the Iran deal collapsing has been priced in. He anticipates crude oil could jump another $5 per barrel once the news is confirmed.

Of course, that means oil prices could drop sharply if Trump decides to keep the Iranian deal intact.

Related: Why Exxon isn't enjoying America's big oil party

One thing that could give Trump pause: It's a precarious time to put Iran back into the penalty box.

First, demand for oil is very strong thanks to the healthy world economy. Global oil demand grew during the first three months of 2018 at the fastest pace in nearly eight years, according to Goldman Sachs.

Another problem: OPEC and Russia have teamed up to boost prices by slashing production.

Trump attacked OPEC last month for higher prices, even though his own threats to the Iran deal have also played a role.

Trump has also threatened to hit Venezuela with oil sanctions that would further slash the OPEC nation's crumbling output.

Who will step up?

If no one steps in to fill the void left by Iran, FGE warns that the gap between supply and demand could shrink to the tightest level since 2013, when oil prices were above $100 a barrel.

It's possible the United States could step up by boosting exports. However, US output is already at record highs and it would take time to ramp up further. And pipelines in the Permian Basin, the prolific shale oil field in West Texas, are nearing full capacity.

Analysts said that Saudi Arabia is one of the only major countries that has the flexibility to make up for the loss of Iranian crude. Yet the Saudis have not signaled a desire to disrupt a strategy that has helped lift prices, and oil revenue.

"It's an open question whether or not Saudi Arabia would react," Wittner said.

Indiana Coronavirus Cases

(Widget updates once daily at 8 p.m. ET)

Confirmed Cases: 33068

Reported Deaths: 2068
CountyConfirmedDeaths
Marion9524558
Lake3494175
Cass15897
Allen141966
St. Joseph122134
Hendricks114268
Hamilton113292
Elkhart110128
Johnson1092106
Madison58459
Porter50522
Bartholomew49034
Clark47941
LaPorte42022
Tippecanoe3823
Howard37824
Delaware37636
Jackson3721
Shelby36822
Hancock32727
Floyd31739
Boone30535
Morgan27724
Vanderburgh2592
Montgomery23417
White2308
Decatur22431
Clinton2221
Noble20421
Grant19721
Dubois1903
Harrison18921
Henry16910
Greene16824
Monroe16512
Warrick16528
Dearborn16521
Vigo1538
Lawrence15223
Miami1401
Putnam1357
Jennings1294
Orange12422
Scott1203
Ripley1106
Franklin1098
Kosciusko1011
Carroll933
Daviess8416
Steuben812
Marshall801
Newton7610
Wayne756
Fayette747
Wabash742
LaGrange682
Jasper661
Washington511
Jay490
Fulton471
Clay461
Rush452
Randolph453
Jefferson431
Pulaski410
Whitley383
Owen351
Sullivan341
DeKalb331
Brown331
Starke323
Perry280
Wells270
Benton260
Huntington262
Knox250
Tipton241
Crawford230
Blackford222
Parke190
Spencer191
Switzerland190
Fountain182
Posey160
Gibson142
Adams131
Ohio130
Warren121
Vermillion100
Martin90
Union80
Pike60
Unassigned0161

Illinois Coronavirus Cases

(Widget updates once daily at 7 p.m. CT)

Confirmed Cases: 115833

Reported Deaths: 5186
CountyConfirmedDeaths
Cook753063519
Lake7933281
DuPage7460350
Kane6083167
Will5356268
Winnebago209153
McHenry148870
St. Clair105077
Kankakee83644
Kendall75119
Rock Island63923
Champaign5957
Madison54557
Boone42416
DeKalb3704
Sangamon34328
Randolph2674
Jackson25610
McLean21613
Ogle2002
Stephenson1992
Macon19219
Peoria1918
Out of IL1831
Clinton18017
Union1519
Unassigned1490
LaSalle14113
Whiteside13412
Iroquois1314
Coles12313
Warren1130
Jefferson10116
Knox960
Grundy952
Monroe9311
McDonough847
Lee791
Tazewell704
Cass690
Henry670
Williamson602
Marion500
Jasper457
Adams441
Macoupin442
Perry410
Pulaski410
Montgomery391
Vermilion381
Morgan341
Christian334
Jo Daviess320
Livingston322
Douglas260
Fayette203
Ford201
Jersey201
Menard190
Mason180
Washington180
Woodford182
Hancock160
Mercer160
Shelby161
Bureau151
Carroll142
Bond121
Franklin120
Piatt120
Schuyler120
Clark110
Crawford110
Fulton110
Brown100
Cumberland100
Logan100
Moultrie100
Wayne91
Alexander80
Henderson80
Johnson70
Massac70
Saline70
Effingham61
Greene50
Marshall50
De Witt40
Lawrence40
Richland30
Stark30
Clay20
Edwards20
Gallatin20
Hamilton20
Wabash20
White20
Calhoun10
Hardin10
Pike10
Pope10
Putnam10
Edgar00
Terre Haute
Overcast
66° wxIcon
Hi: 77° Lo: 55°
Feels Like: 66°
Robinson
Overcast
65° wxIcon
Hi: 76° Lo: 54°
Feels Like: 65°
Indianapolis
Overcast
65° wxIcon
Hi: 74° Lo: 55°
Feels Like: 65°
Rockville
Overcast
63° wxIcon
Hi: 75° Lo: 54°
Feels Like: 63°
Casey
Overcast
65° wxIcon
Hi: 77° Lo: 54°
Feels Like: 65°
Brazil
Overcast
66° wxIcon
Hi: 75° Lo: 54°
Feels Like: 66°
Marshall
Overcast
66° wxIcon
Hi: 77° Lo: 54°
Feels Like: 66°
Showers Early, Cooler
WTHI Planner
WTHI Temps
WTHI Radar

WTHI Events