Oil looks elsewhere for risk premium after Iran deal

Iran Deal

While the market is initially celebrating a historic deal with Iran there may be other geo-political risk factors and doubts that may subdue the celebration. The temporary six-month deal that Israel calls a historic mistake is not even sitting well with some members of President Obama’s own party. Iran gets relief from some sanctions in exchange for stopping uranium refinement above 5% and allows inspections and the closures of some nuclear sites. Oil (NYMEX:CLF14) traders are giddy because they believe this will open the door to more Iranian oil exports, yet it might not be the flood of supply that some expect. In the meantime, heightening tensions in Syria and tensions between Japan and China may start to put in the geo-political risk premium that Iran is taking out.

Just what does the agreement do for the global oil market?  Well the most important thing is that it lifts the EU insurance ban on Iranian tankers, which will reduce the cost of Iranian oil to their current customers like India and China. That should increase Iranian oil shipments even though there is no overall lifting of all Iran oil sanctions. Iran can export oil products, yet with the lack of refining capacity that is not really their strong point. 

It does unfreeze some of Iran’s cash assets that were frozen after the EU imposed sanction and after they stormed the UK embassy. Iran can now use the banking system and accesses close to $7 billion in assets. It also allows Iran to sell its gold and silver reserves, which is adding some pressure to the precious metals.

It requires that Iran dilute or get rid of its near-20% enriched uranium within six months. The UN International Atomic Energy Agency (IAEA) is also to be allowed to have “daily access” to Iran’s two main nuclear sites. It can build no more centrifuges and must stop work on the Arak reactor, which is estimated to have the capacity to produce up to 9 kg of plutonium – a key material in making a nuclear bomb.

Yet it seems you can never get rid of the entire risk premium. In Syria thing are heating up again. The AFP reported that “Syrian rebels, including from the al Qaeda-affiliated al Nusra Front, have seized a key eastern oil field, the Syrian Observatory for Human Rights said Saturday. Fighters from al Nusra and other groups have taken the Omar oil field in Deir Ezzor province after clashes overnight," said the monitoring group's director, Rami Abdel Rahman.  Government troops have withdrawn from the field, one of the biggest in Syria, he said. The army already lost the field once, in November 2012, but then recaptured. 

The AFP then reported that The Libyan army declared a "state of alert" in Benghazi Monday and ordered all troops to report for duty after clashes against jihadists in the eastern city killed at least three soldiers. A security spokesman told AFP that military governor Colonel Abdullah al-Saiti "decreed a state of alert" and called on all soldiers to report for duty at their barracks.”

Then there are renewed tensions as China establishes a so called air defense zone raising the anger of Japan over some disputed Islands. The FT writes that “The small uninhabited group of islands known as the Senkaku in Japan and the Diaoyu in China are located in the East China Sea between Japan, the People’s Republic of China and the Republic of China in Taiwan. The island group contains five uninhabited islands and three barren rocks. Japan has administered the islands since 1895, apart from a period between 1945 and 1972, when the U.S. formally relinquished its post-World War II control over parts of Japan. China and Taiwan both claim the islands as part of their own territory.”

They also write that “One of Japan’s strongest claims to the island group is the fact it has administered it for so long. By declaring its ownership over the airspace above the islands and by sending regular naval patrols to the area, Beijing is establishing its own track record of “administration” that it can point to in the future. By forcing airlines from Japan and other countries to submit their flight plans to the Chinese government when they pass over the islands, and thus tacitly acknowledge Chinese ownership of the territory, Beijing has already won a small victory. But the move has the potential to backfire spectacularly if it leads to a mid-air collision or triggers a dogfight between Chinese and Japanese fighter jets. Military analysts say such an incident could easily spiral into open war because at present there are no emergency direct communication lines between the two militaries. They also agree it has been made much more likely by the latest Chinese move.”

The U.S. came out strong against the Chinese move and China said the remarks were inappropriate.

For oil, our target of $88 looks golden, but be aware of some snap backs! Product options expire today and that can lead to some decent moves across the complex. Natural gas bulls are basking in cold weather and we could see this market pop again.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.