Iran, Us Foreign Policy and Oil

Andamento del mercato - 18/05/2018

It is not often that we witness a foreign policy step with the kinds of implications the US repudiation of the Joint Comprehensive Plan of Action had on world markets. The first effect, and it was quite seismic in its reverberations, hit the oil patch. Crude, both WTI and Brent, rose over 16% since the announcement that the US administration was going to remove itself from the JCPOA also commonly referred to as the Iran Deal. 15% in a month is a tremendous move for any commodity and surely one as widely traded and crucially important to the world’s economy7 as crude oil. And the price of oil is not the only asset affected by the reversal of the US policy on Iran. Just yesterday the French integrated oil giant Total withdrew its participation in a gas project in the Pars field in Iran valued at $1 billion. Simply foregoing its participation in a very large source of energy because it is in Iran. There will be more such contraventions. And why?

The idea behind sanctions is to coerce behavior. In the case of Iran, the world’s nuclear powers, sought to arrest the development of Iran’s nuclear ambitions by imposing harsh (relatively speaking. Sanctions are preferable to military force after all) financial and trade restriction on the country. They were effective. The outcome the JCPOA circumscribed the possession of the bomb by Iran for around ten years. The Trump administration felt that this was a weak, appeasing agreement. It doesn’t curtail the Iranians developing a delivery system i.e. long rang e missiles and it doesn’t forestall the Iranians fomenting all sorts of regional mayhem in the Middle East. The question this time around is whether the sanctions the US imposed in the last rotund will have the same effect. Are they likely to be enforced with the same degree of determination if Russia, China, France, Germany and Britain are not enforcing them? This is the question. We are of the opinion that the effect will be less compelling than the pre JCPOA sanctions were, though they will be disproportionate to the singe sanctioning country as she has disproportionate influence in the world, particularly in global finance. Therefore we see the price of oil rising considerably higher than it current levels. It is early innings in this affair. It is going to get a lot worse before it gets better.

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