FTAlphaville offers a solid lineup of political economy analysis of the five powers/Iran deal today. First, is a skeptical Barclays:
Despite the landmark agreement, we believe that next phase of the talks will prove challenging. A key question is whether the current Iranian concessions represent a floor or a ceiling. If it is the latter, it will likely be very difficult to get the US Congress to go along with the deal. On Saturday evening, President Obama warned the US Congress against potentially derailing the deal by enacting additional sanctions legislation during the next six months. As we have noted before, many of the most restrictive sanctions – including the restrictions on dealing with the Iranian central bank and the requirement for foreign countries to reduce their Iranian oil imports every six months – originated in the US Congress, not the White House. These measures were passed with overwhelming, bipartisan support in both the US House of Representatives and the US Senate. While President Obama has latitude to waive implementation, outright repeal would require action by both houses of Congress. To date, Congress has shown no signs of removing any of these sanctions, in fact it is currently considering additional punitive measures.
On Sunday, a number of US lawmakers took to the airwaves to criticize the White House for allowing Iran to retain some much of its critical nuclear infrastructure. The Chairman of the House Intelligence Committee, Mike Rogers, warned that “We have just rewarded very bad and dangerous behavior.” Similarly, Bob Corker, the ranking Republican on the Senate Foreign Relations Committee, stated that there is significant bipartisan skepticism about the deal and vowed “to hold the administrations and the international community’s feet to the fire over the next six months to ensure that this interim deal is not the norm.” While Republican lawmakers have been the most vocal opponents of the deal thus far, several senior Democrats have voiced concerns. For example, the top Democrat on the House Foreign Affairs Committee, Elliot Engel, said “It’s disappointing to me that Iran is still going to be allowed to enrich while they’re talking,” and added “I don’t think you make them bargain in good faith by going squishy.” New York Senator Charles Schumer, the third most powerful Democrat in the chamber, also indicated that he was “disappointed” and warned that the “disproportionality of this agreement makes it more likely that Democrats and Republicans will join together and pass additional sanctions when we return in December” (quoted on the Politico Web site, 24 November 2013). It is also worth noting that a number of Congressional leaders from both sides of the aisle have recently gone on record calling for Iran to cease all uranium enrichment and to dismantle its facilities before receiving sanctions relief. Such a position is seemingly closer to the one advocated by the Israeli Prime Minister than the White House. Moreover, if the eventual scale of the sanctions relief offered under the Geneva agreement exceeds what is outlined in the official White House statement, Congress could be further emboldened to try to scuttle the agreement, in our view.
The Israeli government has been particularly vocal in its criticism of the deal. Prime Minister Netanyahu called the agreement a “historic mistake” and warned that “Israel is not bound by this agreement.” He further stated “As prime minister of Israel, I would like to make it clear: Israel will not allow Iran to develop a military nuclear capability.” Other senior Israeli officials have strongly criticized the P5+1 for failing to learn from the North Korea experience, where relief from international sanctions failed to halt Pyongyang’s clandestine nuclear activities and eventual development of weapons. It will be worth watching over the next several weeks whether this rhetoric ratchets up and if it is viewed as credible or dismissed as bluster. The Saudi response also bears close monitoring. Senior Saudi officials have been very vocal in their criticism of the fledgling US-Iran rapprochement and some have even warned that in response the Kingdom could seek to acquire nuclear weapons from a country such as Pakistan. Again, only time will tell whether the Saudis plan to make good on such threats, but a nuclear arms race in the Middle East would likely offset the security dividend gained by a freeze on Iranian nuclear activities.
Implications for prices
In terms of the impact on prices, the lifting of the sanctions coincides with a period where market balances are not entirely constructive to support current price levels. While large supply shortfalls besides Iran continue to create a void in the market (Iraq, Libya being the major ones); demand growth globally remains lackluster, with fragile margins continuing to cap refinery appetite for prompt crude.
Despite the loosening fundamentals, positioning in the market continued to be cautious when it came to expressing a bearish view, given the geopolitical uncertainty surrounding Iran. While heading to the previous talks, sentiment had swung in favour of a best-case scenario and the markets saw a swift drop, this was quickly reversed and further gains were made as shorts exited in a rush. With this interim deal, a combination of non-constructive fundamentals and sentiment based on the easing of the risk premium could assert significant pressure on the prompt for Brent, in our view.
That said, beyond the near term, a downward drift prices in reaction to this interim deal announcement may be short lived. Events in the horizon have the potential to lift prices swiftly again. Most notably, heading into the OPEC meeting (4 December) with Brent prices at a lower level than the previous meeting, the discussions and official statements are likely reflect a cautious view of the state of market balances and raise the possibility of managing the group’s production quota. Also, holders of spare capacity that have been stretching themselves to fill the supply void, are likely to pare output to balance markets.
Beyond the reaction of the fundamentals forces mentioned above that shape market balances and prices, market sentiment is also likely to influence price levels. Critical statements from Israel and their impact on sentiment and risk premia given the geopolitical ramifications are worth keeping on the radar. Also, any indications of a nuclear arms race in the region, involving Iran’s neighbors, or a worsening of sectarian tensions in Iraq or Syria, could raise the security risk profile in the region, with the potential to swiftly reverse the current softness in Brent prices.
That seems about right but it’s not news and is overly gloomy. The Middle East is always like this, after all. You shouldn’t discount the deal completely.
Still, in the near term I agree, as does Credit Suisse, that little price relief is likely:
Before a bigger deal is done, only a little slippage is likely
Iran has floating oil in storage in, reportedly, 12 VLCCs in the Persian Gulf. Those 25-30 million barrels may “leak” into the market before too long, if Iran is willing to take “IOUs” and if customers are willing to run the risk that in the event that no deal is reached they then may jeopardize the granting of future sanctions relief from US authorities.
- Upside once a more comprehensive deal is reached, some six months from now is material, in our view. Most service companies and oil firms that have operated in Iran believe that its reservoirs and productive capacity have been impaired to some degree by sanctions. But in our view, estimates that it could take years to re-establish pre-sanctions productive capacity of some 3.8Mb/d are too pessimistic. We project that within two quarters after comprehensive sanctions relief is achieved Iran will have recovered 75% of its 1 Mb/d of shut in capacity.
And will it get done? From Eurasia group:
Despite this multi-layered opposition, we believe the sides will probably reach a final-status agreement, but it’s a close call (60%). Iran agreed to the “more for less” deal hoping for the payoff at the end of talks. If diplomacy fails, Congress will ensure that the US imposes extremely harsh sanctions, while France will ensure that EU measures stay in place. The bedrock of sanctions would remain strong. Given the dire state of Iran’s economy, the regime will try hard to avoid that outcome. As mentioned, Iran will continue to bleed financially during the course of the interim deal. In fact, the administration will almost certainly enforce sanctions with special vigor during the interim agreement to ensure that sanctions don’t atrophy. Certain interest groups, including the powerful energy and auto sectors, will taste sanctions relief and seek more. The US has now begun to acclimatize Congress and Israel to the idea that Iran will have a circumscribed enrichment program over the long-term. Finally, the administration has a very strong, even trump argument at its disposal; if this deal fails, the only way to prevent Iran from becoming nuclear-weapons capable is a war. That line will resonate with Congress.
The new arrangement has obvious merit for the US and Iranian national interests but the US Congress has its fair share of actors that view the Israeli/Arab conflict through a less pragmatic prism. They will try to scuttle the deal so counting chickens here is unwise.
