Ideas & Debate

Trump, Iran have a huge impact on global oil markets

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Iran has the fourth largest oil reserves in the world and is a preferred upstream investment destination because it has low unit production costs when compared with the high cost deep sea and non-conventional sources. FILE PHOTO | NMG

When the Iranian nuclear deal was signed in 2015 and economic sanctions against Iran lifted, I wrote in this column how additional Iranian oil and gas resources would be unleashed into the global markets. Although the accord was signed when the world was already awash with oil supplies, Iran has since then attracted oil and gas investments and stepped up exports.

Iran has the fourth largest oil reserves in the world and is a preferred upstream investment destination because it has low unit production costs when compared with the high cost deep sea and non-conventional sources.

Since 2015, many European, Asian, and Russian firms have actually ventured into Iran. This includes the French oil giant Total which has taken a large stake in Iran upstream sector.

However, for good reasons American companies have kept away because in the 2016 presidential campaigns, candidate Donald Trump was promising to undo the Iranian nuclear pact if elected.

This month, President Trump has actually removed USA from the Iranian nuclear deal against strong advice from UN, EU and Russia who are co-signatories. The withdrawal means US will re-impose economic sanctions on Iran. On its part, the EU is frantically engaged in damage control to protect EU investments in Iran from potential impacts of US economic sanctions.

US sanctions against any country are usually a complex affair. They negatively impact any trade or investments which have dollar-linkages ( FOB pricing , financing, payments , banking , shipping etc). For example, Kenya’s dollar trade with Iranians, including tea exports, may be affected.

The US decision on Iran will create unintended consequences for US, as other currencies like Yuan and Euro will be seeking to weaken US dollar stranglehold on world trade. For example, the Chinese are planning to launch the “petro-Yuan” for their oil imports in lieu of petro-dollars. Trade barter is the other option to circumvent the dollar predicament, with the Iranians already negotiating “goods exchange” for their oil exports.

READ: Turkana leaders urge residents to allow oil exports next month

Although the fundamentals of oil supply and demand have not significantly shifted in the past weeks, Trump’s action on the Iranian nuclear pact has prompted speculation which has spiked oil prices to new high of $80.

However the reality is that there is enough spare capacity within OPEC, Russia and USA to absorb any immediate supply shortfalls from Iran, and this will moderate the speed and quantum of oil price changes in the coming months with the likelihood of prices slumping back to mid- $70s when the actual impacts of Iranian oil supply are factored in.

Medium term, the critical unknown is how the EU investments to develop Iranian oil and gas resources, will survive the US economic sanctions against Iran.

In the 1970/80s, it was the Israel-Arab-Palestinian geopolitical temperatures that mostly influenced global oil prices. With the Palestinian agenda now apparently abandoned by the world, the Sunni Arab and Israel attention has shifted to Iran, a common foe.

The structure of the new conflict for the Middle East control and influence has Israel/Saudi Arabia/UAE and USA on one side, and Iran/Syria and Russia on the other. The first group has Prime Minister Benjamin Netanyahu of Israel as the apparent driver, with President Trump visibly facilitating. Russian President Vladimir Putin is doubtlessly the strategic influence for the second group. China is the “grown-up” neutral observer who strategically stands to benefit from the spoils.

Whatever is happening in the Middle East has an impact not only on global trade but specifically on oil markets and prices. Any act of belligerence will impact oil commodity speculation.

The signatories to the ongoing pact to control oil production are in opposing sides of the Middle East geopolitical conflicts. They are brought together by a shared interest to stabilize oil revenues and their national budgets. However, if prices stabilise around $80, the relevance of this alliance is unlikely to last beyond 2018. If this happens, oil production will go into a free for all modes, and may even see prices dropping.

Finally, the Iranian predicament will accommodate itself in new global oil supply/demand fundamentals and, as always, the usual market dynamics will prevail.

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