Potential For Progress In Nuclear Talks Remains

BMI View: Although latest talks between Iran and the 5+1 powers on the Islamic Republic's nuclear programme ended short of a deal on November 10, potential for progress in negotiations remains. We see both upside and downside risks to upcoming talks, and expect oil prices to remain sensitive to developments.

Talks in Geneva between Iran and the so-called 5+1 powers (the United States, Russia, China, France, Britain and Germany) on the Islamic Republic's nuclear programme ended short of a deal on November 10. Talks seemed on the verge of a breakthrough according to US officials. However, prospects of a deal waned after French Foreign Minister Laurent Fabius dismissed the plans as a "fool's game" of one-sided concessions. That said, US Secretary of State John Kerry said the US and Iran have "narrowed differences" and made "significant progress", while Iranian Foreign Minister Mohammad Javad Zarif said that differences among the parties were to be expected and that he was pleased all were "on the same wavelength".

Discussions left questions about the Islamic Republic's willingness to suspend its nuclear- enrichment activities unresolved, as well as the possibility that the West could ease economic sanctions on Iran. We believe that a deal would not have been clinched even without France's opposition. Indeed, France was simply more vocal about unresolved issues that also concerned other nations. Given that France has maintained better relations with Iran than the US and UK, Fabius was better positioned than his counterparts to announce that a deal was still out of reach. New talks will take place on November 20 in Geneva. Meetings will be at a lower level than those which have just taken place, and are unlikely to include all foreign ministers, an indication that officials will likely work on technical details. Although we do not expect a major breakthrough to take place in upcoming talks, potential for significant progress in negotiations remains.

Oil Prices Sensitive To Developments
Brent Oil Prices, US$/bbl

BMI View: Although latest talks between Iran and the 5+1 powers on the Islamic Republic's nuclear programme ended short of a deal on November 10, potential for progress in negotiations remains. We see both upside and downside risks to upcoming talks, and expect oil prices to remain sensitive to developments.

Talks in Geneva between Iran and the so-called 5+1 powers (the United States, Russia, China, France, Britain and Germany) on the Islamic Republic's nuclear programme ended short of a deal on November 10. Talks seemed on the verge of a breakthrough according to US officials. However, prospects of a deal waned after French Foreign Minister Laurent Fabius dismissed the plans as a "fool's game" of one-sided concessions. That said, US Secretary of State John Kerry said the US and Iran have "narrowed differences" and made "significant progress", while Iranian Foreign Minister Mohammad Javad Zarif said that differences among the parties were to be expected and that he was pleased all were "on the same wavelength".

Discussions left questions about the Islamic Republic's willingness to suspend its nuclear- enrichment activities unresolved, as well as the possibility that the West could ease economic sanctions on Iran. We believe that a deal would not have been clinched even without France's opposition. Indeed, France was simply more vocal about unresolved issues that also concerned other nations. Given that France has maintained better relations with Iran than the US and UK, Fabius was better positioned than his counterparts to announce that a deal was still out of reach. New talks will take place on November 20 in Geneva. Meetings will be at a lower level than those which have just taken place, and are unlikely to include all foreign ministers, an indication that officials will likely work on technical details. Although we do not expect a major breakthrough to take place in upcoming talks, potential for significant progress in negotiations remains.

Possible Scenarios & Potential Impacts As Diplomacy Advances
Event Summary Timeline Impact On Oil Market
Scenario 1 Gradual Improvement 12- 24 months Change in Sentiment: Lower Risk Premium; Prices Drop US$5 -US$8/bbl
Scenario 2 Breakthrough 6 - 12 months Change To Market Fundamentals & Sentiment: Prices Could Fall To US$80/bbl Range
Scenario 3 Tactical Move - Breakdown 6 -12 months Change in Sentiment: Prices Rise As Optimism Fades And Risk Premium Rebounds
Note: Broad impact of potential outcomes, discounting other exogenous events to negotiations such as volatile Libyan production.

Upside And Downside Risks To Negotiations

Expectations of a swift solution to the issue were in our view over-optimistic. An agreement would have conceivably required Iran to suspend some of its enrichment of uranium and make its nuclear research more transparent. However, we believe that a host of technical challenges needs to be resolved before this can eventually be achieved. An important step forward may have been reached on November 11, when the United Nations and Iran announced an agreement to cooperate on resolving outstanding issues regarding the country's nuclear programme. According to Iranian State TV, the deal included a road map designed to give UN inspectors a broader reach, including access to a heavy water reactor under construction and a key uranium mine. This development could significantly facilitate upcoming negotiations.

On their part, Western officials proposed in recent talks that they would ease some financial restrictions on Iran in a manner that could be reversed if a more comprehensive accord failed to follow. This would have reportedly included a temporary easing of the sanctions on petrochemicals, gold and auto trade and some access to frozen Iranian assets. However, given more than 30 years of strained relations between Washington and Tehran, we believe that more time is needed before a sufficient measure of trust is eventually built between the two sides. In addition, significant opposition by hardline US policymakers as well as by the Israeli government means that an agreement could be reached only if very significant guarantees are given by Iran over the peaceful nature of its nuclear programme.

Israel Prime Minister Benjamin Netanyahu has long argued against reaching any agreement short of dismantling Iran's nuclear enrichment capabilities. According to reports, Netanyahu called British Prime Minister David Cameron, Russian President Vladimir Putin, German Chancellor Angela Merkel and French President François Hollande during the weekend, asking them to block a possible deal. In addition, US lawmakers said on November 10 they aim to tighten sanctions on Iran to prevent Washington giving away too much in a deal on Tehran's nuclear programme. Senator Robert Menendez, the Democratic chairman of the Foreign Relations Committee, said he may try to attach such a measure to the annual defence authorisation bill that could come to the Senate this week. His comments coincided with renewed lobbying from Israel against an agreement, and reflected widespread Congressional scepticism about a rapprochement between Iran and world powers. Such posturing is intended to send a clear message to Tehran that a deal will be struck only if solid and verifiable guarantees are given by Tehran about the peaceful nature of the nuclear programme. That said, Menendez's proposed law be passed before November 20, this would in our view worsen the climate ahead of new negotiations.

Oil Prices Sensitive To Developments
Brent Oil Prices, US$/bbl

Volatility In Oil Prices To Be Expected

Brent crude oil prices rose by 2.0% since November 8, trading at US$105.64/bbl at one point on November 11, largely on the back of the failure by Iran and the 5+1 powers to strike a deal on the Islamic Republic's nuclear programme. We expect developments in negotiations to continue influencing oil prices over the coming months, with progress in negotiations likely to act as resistance to higher prices and setbacks sending prices higher. That said, barring a major breakthrough or breakdown in talks, any impact in prices is unlikely to be abrupt, and would take place in an environment of Brent prices which remain historically elevated and set to continue trading near the US$100/bbl marki over the coming quarters.

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Sector: Country Risk
Geography: Iran
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