As the deadline for Iran nuclear talks looms, the possibility of a deal which in some way lifts crude export sanctions is starting to be realized. As we warned 2 weeks ago, despite all the rhetoric, a confluence of political factors makes a deal highly likely at this point; and as The Telegraph reports, Iran is a sleeping oil giant holding 9% of the world’s proven oil reserves and with an estimated 2m barrels per day of excess supply already sloshing around international markets, any significant increase in Iranian output could easily trigger a further rout in prices. While OPEC may well clamp down on this in June, as The Telegraph concludes, by then a barrel of oil may already be selling for $20.

Crude rejects Yemen premium and starts pricing in the supply from an Iran deal...

As we explained previously, a confluence of political factors makes a deal highly likely at this point however.

Firstly, the USA has a stated policy of pivoting from the Middle East and Europe toward Asia. There are a number of reasons for this, but the major one is that the rebalancing of China is likely to be a fraught affair and nobody can forsee the outcome. As such, the USA would prefer a balance of power stabilising the Middle East, of which Iran and Iraq form an important part.

Second, a number of traditional Middle Eastern alliances such as have been frayed in recent years due to certain conflicts and clashes on a leadership basis. This is not to say that Iran, who are leading the fight against ISIS, are a prospective ally, but they may no longer be part of a defined Axis of Terror.

Third, President Obama is a final term President looking for some final wins. The recent letter from 47 letters in which they claimed to have the power to rewind any Iran deal ironically highlighted his ability to push through a deal if he chose on the response, with a range of parties, from Iranian lead negotiator Zarif to US government officials pointing out that any agreement would be bilateral and binding and that Obama has the power to put this in place. This has been our view for some time as the persistence of multilateral agreements, particularly those likely endorsed by the UN security council is huge, with sanctions also only working if one has assistance from a wide range of parties. Any future US leader could theoretically renege on the agreement, but this is something almost unprecedented and with minimal upside given the agreement will have clauses in case Iran steps out of line.

Fourth, the interim deal extensions which have rolled back Iran's nuclear breakout capability (they had lots of 20% enriched Uranium, which has now been converted to 5%, which takes longer to build a bomb from) have an initial end point at the 28th March for a preliminary deal (to be finalized end of June), with, from our sources, the technical details having already been worked out last year of how monitoring etc would work, but the political side not quite there. The Iranian new year celebrations of Nowruz start on the 21st March, putting pressure on the Iranian side to get a deal done by the 20th as the period after this is one where reaction locally will be minimal and it is generally difficult to get anything done for a while. The P5 + 1 parties are scheduled to start their latest talks on the 15th.

Fifth, the Iranian government has changed to a more moderate Rouhani from the more populist Ahmedinejad and the Iranian economy has stabilised dramatically, something likely to continue as they increase their influence in Iraq. It is notable that there are more American educated PhDs in the Iranian cabinet than the whole of Senate and Congress.

Finally, sanctions are already breaking apart on Iran as Russia has been pushed out in the cold due to what I believe is the true Clash of Civilizations. There have been numerous moves for increased co-operation between the two countries as part of Russia's push to increase its soft power in the Middle East as it fills the gap left by the departing USA and Russia is also set to sell Iran Antey-2500 anti-aircraft missiles, an upgrade on the already agreed S300 system. This is an interesting system as it offers anti-ballistic missile protection as well as anti-aircraft protection, effectively hardening Iranian nuclear sites against Israeli attack (the US could still overwhelm it)

So, with these factors it seems we are heading to a deal perhaps next week, or if not in June of this year when the interim deal officially subsides. After June given the political environment in the US and likely developments in Iran, it will become considerably more difficult.

And now, as The Telegraph reports, the deadline is looming and oil prices are starting to reflect the possibility...

In terms of commodities, the biggest impact that a resumption of normal economic relations with Iran will open up is in the oil industry. Tehran is a sleeping oil giant, which has been frozen out of international markets and denied access to key technology and investment that could lead to a massive surge in its potential to produce oil and gas. The country holds 9pc of the world’s proven oil reserves and a nuclear deal that could open up its fields to foreign investment is potentially game changing for the industry.

With oil prices continuing to come under pressure from an estimated 2m barrels per day of excess supply sloshing around international markets, any significant increase in Iranian output could easily trigger a further rout in prices. The price of a barrel of crude has fallen 50pc since last June to trade around $50 per barrel but and agreement in Lausanne to restore Iran back into the international community could easily trigger a further sell down towards levels around $20 per barrel.

Ahead of the Lausanne talks, Iran’s oil minister Bijan Namdar Zangeneh said that the country could easily increase production by 1m barrels per day (bpd) within months of sanctions being lifted. Under the current terms of the economic sanctions designed to bring Tehran to the table the country’s oil exports are restricted.

“In case the international sanctions against Iran are lifted, 1m barrels a day will be added to the country’s crude-oil production and exports in several months,” Mr Zanganeh has said in recent weeks.

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One significant barrier to a major increase in Iran’s oil output could be its membership of the Organisation of Petroleum Exporting Countries (Opec). The 12-member cartel, which controls a third of the world’s oil supply, maintains a quota system that Tehran would have to negotiate. It’s unlikely that Saudi Arabia would be willing to support any increase in Iranian exports, which sets up a tense meeting of the group’s ministers when it next meets in Vienna in June. By then a barrel of oil may already be selling for $20.
 

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Which leaves us wondering... just what outcome does Obama want? A 'deal' saves face internationally but crushes the doemstic shale industry and implicitly the US economy... or 'no deal' which might force a wider proxy war spread to Russia (good for US military spending), make Israel happy-ish, but raise the threat potential in the middle east and the potential for more US-ally-deserters to start acepting Iran crude no matter what...