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The impact of Trump-Iran standoff on markets

Overnight, US president Donald Trump pulled out of the Iran nuclear deal and said he will reintroduce sanctions on the Middle Eastern nation. How is this going to impact markets?

Garry white employee

by
Garry White

in Features

09.05.2018

President Trump’s decision to pull out of the Joint Comprehensive Plan of Action (JCPOA), known commonly as the Iran nuclear deal, may have implications for the oil price.

Iran is a major player in world oil markets, as the country has almost 10% of the world’s crude oil reserves, according to data from the US Energy Information Administration. More than 70% of Iran’s crude oil reserves are located onshore, with the remainder mostly located offshore in the Persian Gulf.

Despite these abundant reserves, Iran’s crude oil production has undergone years of underinvestment. Since the lifting of sanctions in the JCPOA, oil production reached almost 4.7 million barrels per day (bpd) in 2017. It has been estimated that new sanctions could hit between 700,000 and 1 million bpd form world oil markets.

The largest buyers of Iranian crude oil and condensates in 2017 were China, India, Turkey, and South Korea and the US state department overnight warned these countries to start reducing their imports immediately. However, China managed to find ways around the last set of Iranian oil sanctions and is likely to try and do the same this time.

The oil price had been rising in anticipation of this move – and oil futures initially fell after the announcement. However, the fall didn’t last long and Brent crude futures rose to their highest level since the end of 2014 at more than $77 a barrel. If gains continue, this could boost inflation in developed markets, which may have a dampening effect on economic growth. However, Saudi Arabia may be prepared to fill the gap to keep oil markets stable. “The Kingdom will work with major producers and consumers within and outside OPEC to mitigate the effects of any supply shortages," the state-run Saudi news agency noted.

The news is also a net negative for net oil importers, with emerging markets countries such as Turkey dependent on foreign oil as the dollar is on the rise too. Indeed, the Turkish lira hit a record low against the dollar this morning. Winners will be oil exporters such as Russia and Norway. In fact, Saudi Arabia could be a major beneficiary as crude oil may remain strong and it can pump more oil to replace lost Iranian barrels. A higher oil price is also supportive of Saudi plans to float state-owned oil company Aramco.

There are also some delays built into the Iran accord – a reconciliation period of about a month, and delays of 90 to 180 days before sanctions are re-introduced. However, Europeans remain in the deal and do not seem willing to line up behind the US and China, which has said it will “safeguard” the deal. As with North Korea, President Trump is concerned about the ability to deliver fissile material on a missile – and the JCPOA doesn’t prohibit Iran from testing missiles at all. As with most of the current global issues the current US administration is dealing with – NAFTA, Chinese trade, steel tariffs – the president believes he can get a better deal. He also believes that Iran is not really sticking to the spirit of the prior agreement.

This means that there is a great deal of uncertainty over what will ultimately occur – and we need to see the details of any potential sanctions. This could be an issue for European companies if the US is take penal action against Iran and its business partners – as many had fallen foul of previous restrictions. In 2013, Royal Bank of Scotland was fined $100m by US authorities for breaching sanctions with Iran, Burma, Cuba and other countries. In 2014, French bank BNP-Paribas agreed to pay almost $9bn to resolve accusations it violated US sanctions against Sudan, Cuba and Iran. Deutsche Bank was fined $258m for similar reasons.

One area where there is likely to be a big impact is in aircraft sales. Following the JCPOA, Boeing and Airbus signed deal worth around $40bn to sell aircraft to the country. Airbus could fall foul of any sanctions because the group is subject to US export restrictions because more than 10% percent of the parts on its aircraft are manufactured by American businesses such as United Technologies and General Electric.

It could also be an issue for oil majors that have stuck deals to help with Iran’s oil and crumbling infrastructure. For example, French oil major Total's multibillion-dollar gas project in the country could be at risk if sanctions are introduced and it is unable to secure a waiver.

For now the unilateral US move has only had a limited impact on markets – but it has created another risk and that’s why equities sold off in the wake of the announcement and the gold price rose. So, yet again we are waiting to see through President Trump’s bluster and find out where everything will settle. It is likely to be a number of months before it becomes much clearer.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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