Recent talks in Vienna between the US, EU, and the International Atomic Energy Commission to reconsider the Obama-era Iranian nuclear deal have triggered a wave of headlines, and a new market narrative. So far, these renewed discussions have raised far more questions than answers. It was a small, but much hyped, first step on this issue for President Biden.
To be sure, the Biden administration was always more likely to reopen these talks at the request of our European allies than the previous administration. However, have the odds of ending these sanctions, and reembracing the Iranian nuclear deal, materially increased in 2021? And if so, is there a quick path to a political solution that would allow Iranian exports to flow freely? We can all stipulate that Iranian sanctions will be lifted at some point. The more pressing question is whether this is likely to happen this quarter, or even this year.
Obviously, there is no crystal ball. But what we can provide is framework for thinking about timing, be it the end of Iranian sanctions, or OPEC+/Saudi plans to adjust supply going forward. It was just two weeks ago that OPEC+, led by Saudi Arabia, agreed to an unusually transparent three-month deal to gradually increase OPEC supply by a cumulative 2 million bpd over May, Jun and Jul. Individual country quotas have already been set, and disclosed, for all three months. Given this, there are few indications of any OPEC+ concern about an imminent return of meaningful Iranian volumes.
To be sure, the market is already aware of long-term land-based cheating via truck through Iraq and the increase in sanction cheating via waterborne sales to India in March. We expect this type of activity to continue, but not at levels materially higher than at present, at least not until we see a more complete easing of sanctions. The reluctance of banks to provide Letters of Credit for cargoes under sanctions, and the difficulty in insuring ships loading sanctioned cargoes at Kharg Island, also acts as a check on the pace at which Iranian volumes can re-enter the market without an actual deal to “fully” remove sanctions.
Several recent developments also make the environment surrounding these talks more challenging, and less likely to deliver swift and easy “success”. Less than a month into his administration, US President Biden ordered an airstrike on sites in Syria controlled by Iranian backed militias. Likewise, in the proxy war between Saudi Arabia and Iranian backed Houthi rebels in Yemen, 2021 has seen an increase in Houthi missile/drone attacks on Saudi oil facilities like Ras Tanura. In response, the Saudi military has also stepped up its strikes on Houthi targets in Yemen.
Iran has also this week accused Israel of “nuclear terrorism” in response to what it calls sabotage in the explosion, and blackout, at Iran’s Nastanz uranium enrichment site. What may be more significant is Tehran’s other reaction. Midweek Tehran let it be known, via Abbas Araghchi, its Deputy Minister of Foreign Affairs, that it would begin enriching Uranium to 60%, Iran’s highest level ever, on the way to 90% weapons grade.
None of the above developments appear conducive to smooth discussions, or quick solutions, to the complex geopolitical issues being discussed alongside the future of Iranian sanctions. Likewise, we think President Biden has more pressing priorities in his first year given the more pressing economic and social problems in the US created by the COVID pandemic. Iranian nuclear discussions do little to aid US recovery from COVID and little to capture US voters’ attention. Expect more talks, headlines, and narrative on the progress of these talks in the weeks and months ahead. We agree with OPEC+ in the sense that we see virtually zero chance that sanctions will be lifted before 2H 2021. Yes, President Biden has put us back on the path with these negotiations. But that path remains quite long and laden with pitfalls.