Oil Rallies As Trump Announces Decision To Impose Fresh Sanctions on Iran

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2015 Nuclear Deal Voided

In line with broad market expectations, President Trump ripped up the Iran nuclear pact agreement this week. Announcing the US’s withdrawal from the 2015 nuclear deal agreed with Iran, Washington yesterday announced that it will restore sanctions on Iran which had been in place prior to the deal.

In terms of its impact on oil, as the restrictions will take up to six months to kick in and considering that there is no support from other P5+1 members, the US’s announcement of fresh sanctions has had a dovish effect on supply, underpinning oil prices. However, given that there is enough spare OPEC capacity to buffer any shortfall from missing Iranian supply, the rally in crude has been moderate for now.

Broader Market Reaction

In terms of the broader market effect from these sanctions, it is possible that some European firms will avoid dealing with Iran, similar to what we saw when Russian sanctions were implemented, as the US can remove access to US banking and clearing systems, in essence giving European companies a choice of whether to deal with the US or Iran.  If this situation does transpire, obviously it would have a greater downward effect on Iranian production though likely to be moderate in scale.

Additionally, if China, the UK, France, Russia and Germany do not support the US sanctions on Iran, these will clearly be less effective than the prior sanctions imposed under the Obama Presidency. It is also worth considering that, in light of the statement by Iran and other P4+1 Countries stating that the current agreement is still valid and they will negotiate, it is also possible that the sanctions wont actually come to pass.

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Iran’s Position

Iran is currently the third largest oil producer in the OPEC group, producing roughly 3.8 million barrels per day, making it the fifth largest producer globally. The re-imposition of sanctions on Iran could see as high as 1 million barrels of Iranian crude being wiped off the market each day if Europe, Kore and Japan also agreed not to deal with the country.

In the broader context of oil production, even if Iranian oil is removed, Saudi Arabia and Russia both still have the capacity to replace the short fall, given that OPEC’S current spare capacity is around 2 million barrels per day. Furthermore, India and China, which are the biggest users of Iranian oil, are highly unlikely to respect and sanctions imposed by the US and will keep imports steady or even increase them if Iran provides financial incentives.

Furthermore, any action by the US against Chinese entities would be a risky move given the current climate of tense trade negotiations and the US will not want to risk retaliation. Indeed, such a move would likely embolden the case for those who want to push away from using USD as a settlement currency.

The market is now keenly awaiting any further comments form President Trump. Any further, harsh rhetoric is likely to have a stronger supportive effect for Oil as demand increases. If the situations escalates and other countries become involved such as China, then this effect could be further exacerbated.

Technical Perspective

Fresh Sanctions on Iran 1

After breaking above the 67.07 2017 high, Oil is now well on it way to test the next major resistance level which is the 74.82 level, which was the 2011 low. This is a major level for the market and any technical selling which kicks in here should see oil finding support upon a retest of the 67.07 level.

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