The last few days have seen oil prices bid up 5% or so after flat-lining for a week or two, despite surprising builds in inventory data and ever-increasing production. As prices have risen, so speculators (most notably trend-following momo players such as CTAs have come to dominate the price action).
The lack of downward price action has been pinned on, among other things, a growing belief that President Trump will decide not to renew the Iran nuclear deal and pull US out of JCPOA; thus tightening the oil market by implicitly removing Iranian output (due to a likely reinstatement of sanctions)…
However, as today’s “sell the news” event – following President Trump’s tweet that he will announce his decision on the Iran Deal tomorrow – and now Barclays analysts suggest… the fear of a tightening oil market due to Iran are not warranted.
In a Special Report titled “Trump and the Art of (Breaking the Iran) Deal”, Barclays writes
Given President Trump’s continued criticism of the nuclear deal, the personnel changes in his foreign policy team, and a revitalized US alliance with Israel and Saudi Arabia, US policy has become more confrontational.
Whatever Trump announces this week on May 8 and May 12, the announcement will likely mark the beginning of protracted talks with the other signatories of the Joint Comprehensive Plan of Action (JCPOA). We analyze key aspects of the deal, discuss several scenarios, and assess their effect on the oil and FX markets.
Regardless of his decision, the current Iran deal will not survive under President Trump, in our view. He has two main options:
in the more disruptive one, he does not renew this week’s deadline of oil-related sanctions waivers and enforces significant reductions of Iranian imports within six months; or
he could restate his opposition to the JCPOA, but renew the waiver. This option would buy time as nuclear negotiations with North Korea unfold over the summer. Regardless, his foreign policy continues to ignite tensions in the main oil-exporting center and is, thus, price supportive.
We expect little Iran production effect in 2018 if the waiver is not renewed. Many European buyers would likely suspend purchases in the short term. Under either scenario above, a new US sanctions regime would threaten Iran’s ability to attract foreign investment, especially for Yadavaran and Azadegan, keeping Iran’s output flat or lower through 2025. Whether other members of the P5+1 group counter the effect of US secondary sanctions is another variable that could influence short- and
Prices would likely fall in the benign scenario, but either would fuel already elevated tensions in the Middle East, especially between Iran and Saudi Arabia, with spill-overs to Iraq, Syria, and Yemen.
The geopolitical consequences of a possible dismantling of the JCPOA would likely to play a larger and long-lasting role.
Here’s what Barclays sees next…
Of course, should Barclays be proved correct, and given the dominance of trend-following players in the market, the extremely net-long WTI positioning suggests downside could appear a lot faster than many are assuming… especially as the global synchronous recovery narrative (driving the demand side of the equation) is rapidly falling apart.