Uncertainty is in the air. President Trump’s decision to pull out of the Joint Comp­re­hensive Plan of Action (JCPOA), the Iran nuclear deal, is multidimensional. From geopolitics to global crude markets, everything is under the hammer.

Consequent to the decision, crude markets are on edge. War drums in the in the energy-rich Middle East are getting louder. Within days of the announcement, as per Israeli sources, Iran attacked Israeli positions in the Golan Heights with rockets, prompting an immediate reaction from the Israelis. In the immediate aftermath of the announcement, Houthi rebels lobbed at least four missiles on Riyadh and Jizan in Saudi Arabia.

Trump’s decision was an issue of politics rather than any breach of the agreement by Iran, most — including the former US President Barak Hussain Obama — are conceding. Perhaps one of the most telling moments came on Tuesday when President Trump fell silent as a reporter shouted a question to him. The president was holding aloft a signed executive order reinstating sanctions on Iran, effectively withdrawing from the deal negotiated in Obama tenure.

“How,” the journalist asked, “does this make America safer?” Trump ignored her question. She repeated it. “Thank you very much,” the president said, reiterating “America is safer.” Obviously, the decision has few legs. It was a political decision — fulfilling a campaign promise. France, the UK, Germany, Russia and China opposed the US decision, while Saudi Arabia, its Gulf Arab allies and Israel basked, in what they saw as a political victory over Iran. Where French, German, British and other European diplomatic efforts failed with Trump, Riyadh and Tel Aviv succeeded.

The decision carries major repercussions for the crude markets. Existing division within the Organisation of Petroleum Exporting Countries (Opec) could now get serious, and with political overtones. Within Opec, Saudi Arabia is leading the camp targeting oil prices somewhere between $80-85, or even higher. On the other, Iran and its allies believe a reasonable price of crude is between US$60-65 a barrel. Opec ministers are to meet on June 22. The pricing issue debate would become more politicised.

Eyes would remain focused on the Russian position on the issue. Already Moscow is faced with pressure from Russian oil companies, who do not want more cuts and are lobbying to boost output. Would Russia be on the on the Iranian side or on the side of Saudis thus remain a key issue for the output constraint arrangement?

What could be the short-term impact of the Trump decision on the oil markets? Prices are on track for their fourth consecutive quarterly gain, the longest such stretch for more than 10 years, boosted largely in the past month by fears of disruption in supplies from Iran. Tehran pumps about four per cent of the world’s oil and exports about 450,000 barrels per day (bpd) to Europe and around 1.8 million bpd to Asia. Analysts’ estimates of the possible reduction in Iranian crude supplies as a result of the US decision vary from 200,000 bpd to 1m bpd.

This would help tighten the markets further. Brent crude could return to $100 a barrel next year, or even sooner, Bank of America is saying — and with some foundation. The bank also lifted its average Brent forecast to $70 for this year and $75 in 2019. Brent futures, trading near $77 on Thursday, are set to reach $90 in the second quarter of 2019 as world inventories shrink, the bank said. As that view hinges on Opec reviving output and a limited impact on Iran from US sanctions. How­ever, prices could go even higher, if the assumption gets topsy-turvy, the bank report hinted.

Goldman Sachs Group Inc. too is predicting higher prices, with Brent rising to $82.50 a barrel by the summer, conceding it could even surpass that level.

The emerging geopolitical developments apparently would keep the oil markets on edge for some time to come. That may help Riyadh achieve its short-term goal of maximising returns from the Aramco IPO. But in the longer run that may prove to be disastrous.

Oil prices higher than the current levels may not be good news for major oil producers in the medium and long-term, as consumers will seek alternatives to refined oil products in energy and passenger cars, leading to a decline in oil consumption, the guru of the energy world, Fatih Birol, the Executive Director of the International Energy Agency (IEA), said in a recent interview.

Higher prices will further boost US shale production and encourage deep water in Brazil and Mexico as well, good, old friend, Birol underlined.

Thanks to the emerging geopolitical climate, crude markets are in for an era of sustained volatility.

Published in Dawn, May 13th, 2018