Complex Made Simple

Here’s why oil market should watch Iran election before OPEC meeting

As more than 40 million out of 56 million registered voters went to the polls on Friday in Iran to choose their new president, the oil market did stay awake to know the outcome of the election, which is predicted to have far-reaching consequences on post-nuclear deal Iran.

In the democratic showdown that grabbed the attention of the world, incumbent President Hassan Rouhani, who championed the signing of the 2015 nuclear deal with the P5+1 nations, five permanent members of the UN Security Council plus Germany, was trying his luck against hard-line conservative cleric Ibrahim Raisi and two others.

Deal or no deal?

All the five candidates have promised to the Islamic Republic’s electorate that they will honour the agreement, known as the Joint Comprehensive Plan of Action (JCPOA), which was struck in exchange for the lifting of economic sanctions against Tehran.

Counting of the votes is midway and early reports suggest that Rouhani is taking a strong lead so far. The final results are expected on Saturday.

However, analysts feel if the results are in favour of Raisi, who is expected to win the votes of conservatives, the historic deal may come under threat.

“The fate of the 2015 nuclear deal potentially hangs in the balance, depending on the outcome of the election,” said Helima Croft, global head of commodity strategy at RBC Capital Markets on Monday.

“Raisi would likely support the provocative military and regional policies that are already imperilling the nuclear agreement and are leading to increasing calls in Washington to reinstate extra-territorial sanctions,” warned the analyst, adding that such policies could include “ballistic missile tests, arms shipments to the Houthi rebels and Syrian President Assad, and aggressive naval manoeuvres in the Straits of Hormuz.”

“Having an Iranian president publicly endorse provocative military manoeuvres could fast track a confrontation that claims the nuclear deal as its casualty,” she said.

Fate of oil exports

The clinching of the nuclear deal paved the way for Iran to re-establish its trade relations and has restarted oil exports.

Iran had said that it will increase its oil exports to reach the pre-sanction levels. The country had been holding up to 40 million barrels of crude oil and condensate in floating storage, which it had been unable to sell because of the sanctions imposed on it over the past years.

In December last year, when the members of the Organisation of Petroleum Exporting Countries (OPEC) and non-members including Russia agreed on the first oil output cuts since 2008, Iran was exempted on the grounds that the country had severe economic losses under the sanctions so that it had to be allowed to boost oil production.

Sometime in February, the hydrocarbon resource rich country’s crude-oil exports touched 3m barrels a day for the first time since the 1979 Islamic Revolution.

But analysts fear that any attempts from Iran to flout the nuclear deal could put the brakes on the country’s thriving oil exports, trade and investments.

Unhappy Trump

More importantly, US President Donald Trump has shown his dissatisfaction over the nuclear deal brokered by his predecessor Barack Obama.

During his election campaign, the republic had said that he would abandon the nuclear deal, although the White House renewed sanctions relief for Iran this week.

“A sanctions snap-back could not only deter foreign investment in the Iranian energy sector but could also curtail the country’s ability to sell its barrels abroad,” Croft said.

“Hence, we continue to contend that Iran is one of the most underappreciated upside oil price risks in the oil market,” she said.

The RBC analyst added: “The real risk is not of additional Iranian barrels coming online, but rather of a drop-off due to geopolitical developments.”

This is why Iranian the election is something that traders need to watch out before the OPEC meeting scheduled for May 25.