What is the chance of a U.S. sitdown with Iran in the coming days, weeks or months? And if that were to happen, what would become of oil prices and their impact on Saudi Aramco’s already-delayed IPO?
These are things oil traders have asked without fail since U.S. President Donald Trump’s reinstatement of sanctions on Tehran became effective nearly a year ago.
The same questions have cropped up with increasing intensity after last week’s attack on Saudi Arabia’s oil facilities, which both Saudi Arabia and Secretary of State Mike Pompeo notably blamed on Iran.
And more so now as world leaders group in New York for the U.N. General Assembly — an event that could set the stage for a rare, opportunistic encounter between Trump and his Iranian counterpart and nemesis Hassan Rouhani.
Discerning the geopolitical premium in oil has never been easy, whether one owns a few hundred barrels on paper or thousands of physical drums locked away in bonded warehouses in China or floating on barges off Rotterdam in the form of offshore storage.
Will Saudi-Attack-Led Rally Hold?
As what have become the main actors in the greatest oil supply crisis since the 1970s — Saudi Arabia, Iran and the United States — gather under one roof this week, investors might need to make a call on whether the 7% gain in crude prices since the Sept.14 Saudi attack will stay, grow or fizzle.
To answer that, one needs to consider the multiple variables at play in the market now.
Just a week ago, there appeared zero possibility for any diplomacy between the Trump administration and Tehran as Iran stood accused of a crime on Saudi soil that Yemen-based Houthi rebels readily took credit for.
Yet, in a shift of poles possible only in oil, Iran’s Foreign Minister Javad Zarif told CNN interviewer Christiane Amanpour on Monday that Rouhani was willing to meet Trump in New York this week “provided that President Trump is ready to do what’s necessary”.
Trump Could Be Appeased By Iran Offer For ‘Permanent Monitoring’
For Iran, that, of course, means one thing: the removal of the U.S. embargo that has wreaked havoc on the country’s oil trade and economy. In return, Zarif was quoted by CNN’s Christiane Amanpour saying Tehran was willing to have “permanent monitoring of Iranian nuclear facilities”.
Such “permanent monitoring”, whose practical meaning is yet to be decoded, could appease Trump. The president insists the main reason he canceled the 2016 nuclear deal with Iran, primarily championed by his predecessor Barack Obama, was due to a “sunset clause” that allowed restrictions on Iran’s uranium enrichment and plutonium reprocessing to be lifted in 10 to 15 years.
As of midnight on Monday, Trump had not reacted yet to the olive branch extended by the Iranians.
In his typical vacillating style, the U.S. president said on Sunday:
“Nothing is ever off the table completely, but I have no intention of meeting with Iran, and that doesn’t mean it doesn’t happen.”
“I’m a very flexible person.”
Trump’s zeal to be known as a dealmaker is not lost on political strategists who point out that an Iran nuclear agreement would be a plum prize for the president as he heads for reelection in November 2020.
Rouhani himself has portrayed the image of an emissary coming to the U.N. to facilitate global peace, saying he will present a plan to secure shipping in the Strait of Hormuz and free the Persian Gulf from a flood of weapons. In the same vein, he said Iran, which denies accusations of carrying out the attack on Saudi Arabia, “will not allow anyone to violate” its borders.
U.K., France And Germany Turn The Screws On Iran
But the Iranian president isn’t really bargaining from a position of strength.
In a blow to Iran on Monday, Britain, France and Germany — three of the Islamic Republic’s staunchest allies amid its sanctions spat with Trump — joined the U.S. in accusing Tehran of the Saudi attack.
The three governments said in a joint statement on the sidelines of the U.N. General Assembly that “the time has come for Iran to accept a long-term negotiation framework for its nuclear program, as well as regional security issues, which include its missile programs”.
Given the corroboration of the three key European players of the U.S.’s attempt to finger Iran for the attack, will Trump still agree to a sit-down with Rouhani that comes at the expense of waving — at least temporarily — sanctions on Tehran?
Olivier Jakob, who heads oil risk consultancy Petromatrix in Zug, Switzerland, doesn’t discount the possibility.
Dedicating a portion of his Monday note to the Trump-Rouhani enigma, Jakob said:
“The main bearish risk this week, both for the flat price of crude oil and for the crude oil time-spreads, would be a Trump-Rouhani meeting in New York that goes with some waivers on Iranian crude oil exports.” “Recent events have made this less probable, but the U.S. President is not easily predictable. Crude oil is now in stand-by, it has first to clear the Rouhani-Trump risk and after that reassess the length of repairs in Saudi Arabia.”
If indeed a sitdown between the two arch-rivals comes into play, where would it take oil prices?
Could Oil Revert To Pre-Attack Prices?
John Kilduff, founding partner at New York energy hedge fund Again Capital, said crude prices could return to pre-Saudi attack levels should the U.S. and Iran even set a date for talks. That would mean $58.34 for U.S. West Texas Intermediate crude and $60.22 for U.K. Brent oil. At Tuesday’s levels, that constitutes a selloff of about $4 per barrel, or nearly 7%.
Said Kilduff:
“It’s the most simplistic way of calculating the risk premium in oil now and it doesn’t take into account other bearish risk like Saudi Aramco’s determination in bringing production to full capacity in the shortest time possible to prove all’s well with its financials ahead of its IPO.”
Aramco says its Abqaiq crude processing plant, the main focus of last Saturday’s attack, was back to producing two-thirds of the 5.7 million barrels per day that it regularly turns out, and full production would be restored in a week.
Iran, on its part, said in May it intends to produce at least 1.5 million bpd if it is to enter and stay in a new nuclear deal with world powers. That could be an onerous burden for a market that has completely discounted Iranian production since the U.S. sanctions came into force in November 2018.
...Or Surge $10 Higher Than Today?
Some, like Phil Flynn of Chicago’s Price Futures Group, dispute Aramco’s narrative of a galloping comeback in its production, or that the White House will easily accept Rouhani’s proposed conditions.
Said Flynn:
“The repairs assessed by independent experts of the damage caused to Abqaiq suggest that it will take months to restore regular output. The Aramco IPO is prompting the Saudis to put a positive spin on the production rebound, which unfortunately is bearish for the flat price of oil.”
“All things being equal, I’d expect wisdom to prevail and for oil to trade by the year-end at $10 a barrel higher than where we are today.”