In this list
Electric Power | Natural Gas | Oil | Petrochemicals | Shipping

Insight from Washington: US walks tightrope to de-escalate Iran’s nuclear progress without disrupting oil supply

Energy | Oil | Crude Oil

Platts Crude Oil Marketwire

Commodities | Energy | Energy Transition | LNG | Natural Gas | Natural Gas (European) | Oil | Crude Oil | Refined Products | Fuel Oil | Metals | Steel Raw Materials | Petrochemicals

Market Movers Europe, Sept 25-29: TotalEnergies to announce strategy update amid rising oil prices, Russia's fuel export ban

Oil | Energy Transition | Energy

APPEC 2024

Energy | Energy Transition | Natural Gas | LNG | Oil | Renewables | Crude Oil

TotalEnergies pledges 2%-3%/year output recovery led by emerging market demand, LNG

Energy | Oil | Crude Oil

Dubai Crude Oil Price Assessment

Agriculture | Energy | Coal | Energy Transition | Renewables | Natural Gas

Commodity Tracker: 4 charts to watch this week

For full access to real-time updates, breaking news, analysis, pricing and data visualization subscribe today.

Subscribe Now

Insight from Washington: US walks tightrope to de-escalate Iran’s nuclear progress without disrupting oil supply

  • Featuring
  • Jasmin Melvin
  • Commodity
  • Electric Power Natural Gas Oil Petrochemicals Shipping
  • Tags
  • United States

US efforts to rein in Iran's nuclear program have moved out of the spotlight, but the administration of President Joe Biden continues to pursue a diplomatic solution in hopes of staving off geopolitical unrest and military conflict that would roil global oil markets and worsen the ongoing energy crisis.

With Iran's crude and condensate exports topping 1 million b/d despite US sanctions, any disruption to those exports — either through tightened sanctions enforcement or factors that limit Iran's production and export capabilities — would have a bullish effect on the oil market.

"Given the administration's redline of not allowing Iran to develop a nuclear weapon, the key risk to the market is whether Iran will breach that limit and, if so, what the western response will be," said David Goldwyn, chairperson of the Atlantic Council Global Energy Center's Energy Advisory Group.

"If [Iran's] exports were fully eliminated, [oil] prices could rise by $10-$15/b," he said. The "greatest risk to the market would be a military conflict between Iran and the West, which could potentially threaten all exports through the Persian Gulf and Suez Canal."

Despite current US discontent with China, Beijing may be aligned with Washington on this issue as a nuclear-armed Iran would "likely trigger a nuclear arms race in the Gulf and create instability, which would be harmful to the security of oil supply for China," Goldwyn said.

Although "the US cannot force China to renounce imports of Iranian oil, China has influence," he continued. "Iran knows that it needs China's support more than China needs Iran's oil. China's hand in helping reestablish diplomatic relations between Iran and Saudi Arabia is a demonstration of that influence."

Oil sanctions

Iranian crude and condensate production has averaged around 3.3 million b/d in recent months, as supplies remained 1.2 million b/d below the output seen before the US pulled out of the Joint Comprehensive Plan of Action in 2018, according to data from S&P Global Commodity Insights.

The JCPOA in 2015 set restrictions on Iran's nuclear program in exchange for relief from US sanctions, but the Trump administration reimposed sanctions on Iran's oil, petrochemicals, shipping and other sectors in 2018.

S&P Global's Chief Geopolitical Adviser Paul Sheldon said that Iran's crude and condensate exports have surpassed 1 million b/d in some months, to countries including China, Syria and Venezuela.

"Odds of any nuclear deal through 2024 remain well below 50/50, let alone a full return to the 2015 JCPOA, due to political constraints in both Iran and the US," Sheldon said.

He anticipated Iran's exports to remain roughly flat within its current range through at least the end of 2024, without sanctions relief to expand its list of legal buyers. He also flagged competition with Russian and other crudes into China as limiting any notable uptick in exports.

Diplomatic efforts to ease oil sanctions on Iran have taken a back seat as Iran's extraneous demands, continued human rights abuses and support of Russia's military offensive against Ukraine scuttled talks to revive the 2015 nuclear deal.

"In fact, I think that the [Biden] administration is very much inclined to tighten those sanctions as a way to push Iran back to the negotiating table," said Fernando Ferreira, director of geopolitical risk service at Rapidan Energy Group.

But he added that the US is also cognizant of pushing oil prices higher, so it is doing what it can without risking taking too many barrels off the market.

While the Biden administration has turned up the heat on illicit sales of Iranian oil, targeting sanctions evasion efforts through several rounds of new sanctions, none of those measures exert a "maximum-pressure posture that would force Iran to reduce its exports," Ferreira said, adding that a tougher posture would mean accepting a bigger risk appetite for heightening tensions with China, Iran's biggest customer.

Additional sanctions could marginally cut into Iran's oil exports, but Ferreira said that the much bigger risk stems from if the US and Iran fail to reach a diplomatic arrangement limiting Iran's nuclear program, and Israel takes matters into its own hands with military escalation.

"That would be very, very bullish, and I think that the risk of that is fairly substantial," he said, given that "Iran is at the very top of the potential nuclear escalation ladder" and Israel could decide it must take this window of opportunity to put a stop to further enrichment and weapons capabilities.

Civil unrest

Civil unrest and protests against Iran's government along with its increased cooperation with Russia, including supplying arms used against Ukraine, has further complicated the US approach to reaching a nuclear deal, said Brenda Shaffer, international energy expert at the US Naval Postgraduate School and a senior adviser at the Foundation for Defense of Democracies.

"With these two factors in place, it would be embarrassing for the administration to formally conclude a new deal with Iran," putting the US in "a holding pattern" over this issue.

Shaffer warned oil market participants to remain vigilant of demonstrations and activities in Iran that could impact its ability to produce and export oil.

"The protestors have targeted energy infrastructure in Iran, including with violent attacks," she said. "They have also especially encouraged oil sector workers to strike. Both these trends can increase and disrupt Iran's oil production and export."

She noted that one of Iran's major trade ports — the Chabahar port — is in the Sistan-Baluchistan province, a center of continued anti-regime protests. While demonstrations "have not been especially intense in Iran's main oil and natural gas producing region —Khuzestan, this could change," Shaffer said. "If developments heat up in Khuzestan, this would have major implications for global oil."

What's next?

Restarting nuclear controls on Iran could have lifted oil sanctions and returned as much as 1 million b/d to the tight global market that has few options for near term incremental supply. But any preemptive US relief of oil export sanctions appears highly unlikely now.

"The JCPOA is just not on the agenda right now; we're not focused on that," National Security Council spokesman John Kirby told reporters May 31. "Now, nothing's changed about the fact that we want to make sure Iran doesn't get a nuclear weapons capability. The president still believes that a diplomatic solution to that would be highly preferable."

"But the Iranians were not negotiating in good faith," Kirby asserted. "They've shown no inclination to move in that direction, and given all the other domestic strife inside Iran and support that Iran has given to Russia, we haven't prioritized talks on the JCPOA."

Given that Iran's breakout time — the time needed to produce one bomb's worth of fissile material — is down to less than two weeks and odds of reaching a diplomatic solution are growing increasingly pessimistic, it begs the question: What happens next? Is the world on the brink of a Middle Eastern crisis, or can Washington and Tehran come to at least an interim agreement to pump the brakes on a nuclear showdown?

With no crystal ball in sight, market participants have grown tired of the rollercoaster of negotiations not panning out on Iran and have thus not priced it into the market. Ultimately, the US walks a tightrope to de-escalate Iran's nuclear progress without disrupting oil supplies or having the situation escalate to warfare. One misstep could send those objectives into a freefall with no apparent safety net.

This article was first published in the May 2023 edition of Commodity Insights Magazine. Click here to download the magazine.