The prospect of renewed sanctions against Iran helped send WTI and Brent crude above USD 70 and 75/bbl respectively on Monday, their highs since November 2014. The survival of the six-nation pact remains uncertain, with US President Donald Trump indicating he may end it this weekend, and Iran in turn warning that the US would pay a “heavy price” for doing so.
With less than a week left on the clock for negotiations, a spike in prices is in line with our near-term trading band for crude. But where oil trades next will depend heavily on Trump’s next move:
- Hardline: An end to the US sanctions waiver would likely revive oil sales restrictions, potentially pushing Brent up in the USD 75-85/bbl range in the immediate aftermath. How long prices stay elevated would depend on the scale of the resulting supply disruption, influenced in part by potential offsets from OPEC and European, Chinese and Indian participation.
- Status quo: Crude prices would likely level off if Trump extended the sanctions waiver, trading between USD 64-75/bbl as demand growth is outpaced by non-OPEC supply growth. The impact of the Iran question, pushed down the line to September, would instead be limited to whatever specific conditions Trump might attach to an extension.
So we counsel a cautious approach in the days ahead amid elevated uncertainty. Investors with a high risk tolerance may consider selling Brent's price downside for a premium above money market rates. With the caveat of upside risk if the hardline case comes to pass, we maintain our six- and 12-month Brent forecasts of USD 65 and 62/bbl respectively.
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