Complex Made Simple

Rouhani wins Iranian election: What it means for oil prices

Reformist President Hassan Rouhani has been re-elected in a fiercely contested election that saw unusual voter turnout in Iran on Friday.

More than 40 million out of 56 million registered voters went to the polls in the democratic showdown that grabbed the attention of the world.

When the final results came on Saturday, Rouhani had secured a 57 per cent outright victory over his main rival hard-line conservative cleric Ibrahim Raisi.

Rouhani, who received nearly 23 million votes, said the outcome of the election showed that people rejected extremism and violence.

Raisi received only 38.5 per cent, or 15.7 million votes, so that a run-off was avoided.

Status quo to remain?

With the winning of 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, relations between Iran and the rest of the world are expected to remain pretty much the same.

Moreover, the president has expressed his willingness to reach out to the outside world more often.

“The Iranian nation has chosen the path of interaction with the world, a path which is distant from extremism and violence,” Rouhani said in his first speech after the victory.

Hence the outcome is supposedly a positive development for the global oil market as it brings more stability in Iran and across the world.

Deal or no deal?

Analysts had feared that had Raisi won the election, the nuclear deal would have come under threat even though the cleric vowed to honour the agreement.

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.

“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 in a note 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 in the pre-results note.

What if?

“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.”

Happy ending?

Now that Rouhani has won and there is no such threat to the nuclear agreement, you would probably not expect major fluctuations in the oil prices. But to get a clear picture you will have to wait until the market speak when it opens on Monday.

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