Here’s what will drive oil prices after Trump’s Iran decision

  • Written by MarketWatch
  • Published in Economics

So far, so good for investors. Wall Street isn’t sweating President Donald Trump’s decision to withdraw the U.S. from the Iran nuclear agreement and reimpose sanctions on Tehran.

But will the calm hold? Much will depend on the reaction by Iran as well as by other participants in the multilateral agreement that was designed to curb the country’s nuclear program in return for sanctions relief and economic incentives.

Oil futures surged to nearly 3 1/2-year highs[1] on Wednesday, after finishing lower Tuesday following Trump’s late-afternoon announcement of the decision.

West Texas intermediate crude futures CLM8, +0.48%[2] the U.S. benchmark, rose $2.08, or 3%, to settle at $71.14 a barrel, while Brent crude LCON8, +0.36%[3] the global benchmark, jumped 3.2% to $77.21 a barrel. The S&P 500 SPX, +0.97%[4]  rose 1%[5], with energy the top-performing sector, while the Dow Jones Industrial Average DJIA, +0.75%[6]  advanced more than 180 points, or 0.7%.

The last time sanctions were imposed in 2012, Iran’s oil output fell by around 1 million barrels a day, while oil prices jumped by around 15%, noted Thomas Pugh, commodities economist at Capital Economics, in a Wednesday note.

image After sanctions were lifted, oil exports rebounded, hitting pre-sanction levels near 2.3 million barrels a day in 2017, or around 3% of global supply, said Ashray Ohri, a Mumbai-based economist at ICICI Bank, in a note. But Iran’s customer base has shifted. While exports to European countries, South Korea and Japan, which were slashed during sanctions, partially recovered, China and India largely filled the gap (see charts below). image

The renewed sanctions are expected to dent European demand for Iranian oil, even though European countries, which tried in vain to convince Trump not to exit from the deal and expressed disappointment in the decision, are maintaining the 2015 accord.

A crucial consideration surrounds whether the EU reimposes sanctions on shipping insurance for vessels carrying Iranian crude—an element that was crucial in disrupting the country’s oil exports during the previous round of sanctions, Pugh noted. As long as Iran continues to abide by the nuclear pact, it’s possible that Brussels won’t make that move, which would mean Iran would remain able to export oil to countries...

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