On Tuesday, May 8th, President Trump announced that he would abandon the nuclear deal between Western powers and Iran, throwing oil markets into uncertainty, and – at least in the short term – pushing fuel prices sharply higher. We are still in the early stages of understanding what this announcement will mean for the fuel market and for international relations in the longer term, so we will continue to update our coverage as the situation evolves.
On the simplest level, the announcement signals that the US will reapply sanctions on the Iranian economy, which had been removed when Iran pledged to suspend its nuclear program in 2015. The original deal was agreed upon by Iran and the “P5+1” powers, including the five permanent members of the UN security council (China, France, Russia, the UK, and the US) and Germany. The Western powers had applied powerful sanctions against Iran in order to bring Iran to the negotiation table over its nuclear program. The final deal resulted in the Western powers removing these sanctions, in exchange for the suspension of Iran’s nuclear program. President Trump’s announcement indicates that the US will reapply sanctions, but it is unlikely that the European powers will follow suit, and it is unclear whether Iran will restart its nuclear program in response.
The immediate fuel market reaction to this news has been volatility, as prices have fluctuated by several percentage points up and down throughout the day on both May 8th & 9th. While prices on the NYMEX Heating Oil (HO) market – a common proxy for ULSD commodity prices – closed almost three cents lower on the 8th, they had surged upward by more than six cents per gallon as of this writing on the 9th (see chart above). It is our expectation that this volatility will continue in the coming days and weeks as the many different variables that will be affected by this decision gradually become clearer.
While the full impact of this announcement is being digested, the announcement itself had been widely anticipated for months, and the oil and fuel markets had been slowly pricing this risk premium into the market, as shown in the chart above. As we go forward, there are several key factors to take into consideration, to determine the longer-term impact that this announcement will have on the fuel market. Some of the most important include:
Iranian Oil Exports – One of the simplest – and most impactful – outcomes of this announcement is that it could curb Iranian oil exports, and cut back supply on an already tight global oil market. While the full nuclear deal unlocked 1.5 million barrels/day (mmbd) of Iranian oil exports, as long as the other Western powers keep sanctions off of Iranian oil, the anticipated impact is a reduction of 200,000-300,000 barrels/day that will be taken off of the global market.
Geopolitical Risk Premium – Early signs indicate that Iran will not restart a nuclear weapons program in retaliation for this announcement, but it remains a possibility going forward. If such steps are taken, Saudi Arabia has already announced it would pursue its own nuclear weapons program as a balancing measure in the region. Suffice to say that Iranian isolation – and potential nuclearization – would only make the world (and the oil market) a riskier place.
US Dollar Valuation – With an oil supply shock anticipated, non-US currencies have lost value against the US dollar, the currency in which all oil and fuel is traded on spot markets globally. This relative strengthening of the dollar has served as a partial counterbalance to the other upward price pressures currently at work in the marketplace.
The Advisor Team will continue to follow these developments closely, and we encourage you to join us for a webcast on this topic on Tuesday, May 15th.
If you have questions on the recent diesel market behavior in the meantime, please contact Matt Muenster, Senior Manager of Applied Knowledge, at Matt.Muenster@breakthroughfuel.com.