New Iran Nuclear Deal May Lead To Quick Increase In Oil Production

• From the moment that the U.S. unilaterally withdrew from the JCPOA on 18 May 2018, Iran’s chief strategy was to get some sort of deal back in place.
• The ongoing discussions between the U.S. and Iran about a new version of the JCPOA are not for an all-encompassing version of that original pre-2015 deal.
• The new limited version JCPOA will have a significant effect on global oil prices.

Of all the geopolitical scenarios perennially judged most likely by the world’s governments to escalate into global nuclear war between the superpowers, a military conflict between the Arab states of the Middle East and Israel has always been at or near the very top of the list. For a long time, the threat of such conflict was held in check by the U.S.’s longstanding deep relations with several of the Middle East’s major Arab states, most notably Saudi Arabia, as analysed in full in my new book on the new global oil market order. These relationships no longer exist as they did, with the shift of these states towards China and Russia over the past five or six years. This has left Israel feeling increasingly isolated, threatened, and liable to take unilateral action against those Arab states it sees as being the most dangerous to its continued existence. Iran remains its perceived most clear and present danger - even more so following the 10 March landmark relationship resumption deal between it and Saudi Arabia, brokered by China. It is to avoid Israel taking action that might ignite a global nuclear conflict that the U.S. has now reopened discussions for a new ‘nuclear’ deal with Iran. Before the 10 March Iran-Saudi deal, the U.S. was only interested in negotiating a new version of the nuclear deal (the ‘Joint Comprehensive Plan of Action’, JCPOA) that included key additional demands to those of the version agreed in 2015. And Iran had no interest in agreeing to those demands. The full list of these U.S. demands – which were contained in the original draft of former-President Barack Obama’s nuclear deal and were then resuscitated under former President Donald Trump – are itemised and analysed in my new book on the new global oil market order. However, at the top of that list was a catch-all clause as far as the U.S. and Iran was concerned, and this was that Tehran would have to commit to signing up to the regulations of the Financial Action Task Force (FATF) and then to becoming a fully-regulated and constantly-monitored FATF member. 

Related: Oil Traders Don’t Buy The Saudi Cuts

The reason why this clause was so important to the U.S. – and why Iran refused to negotiate on the issue – was that it has aimed directly at destroying the enormous influence of the Islamic Revolutionary Guards Corps (IRGC) across all areas of Iran’s political, economic, and military structures. The core elements of the IRGC had been instrumental in the Iranian Revolution that culminated on 11 February 1979 with the Iranian monarchy officially being brought down and then replaced by Ayatollah Ruhollah Khomeini. From that point, these elements of the IRGC were regarded as the guardians of that Islamic Revolution. Over the years, though, they had also expanded their influence into a huge financial empire that fuelled this influence both at home and abroad. By the time that the JCPOA was agreed on 14 July 2015, the U.S. view was that the IRGC has placed top commanders at the heart of more than 200 Iranian companies. The U.S. had hoped that by engaging with Iran through the JCPOA from 2015 the IRGC’s influence could be diminished. However, then-Iranian President Hassan Rouhani was unable to effect such a change for several reasons, as also analysed in full in my new book on the new global oil market order. 

Given the inextricable link between the IRGC’s financial empire and its ability to fund terrorism around the world, the U.S. designated the IRGC as a Foreign Terrorist Organisation (FTO) in April 2019. And one of the key intentions behind the FATF is to preclude funding for terrorism, and Iran knows it. There are 40 active criteria and mechanisms in place in the FATF to prevent money laundering (an activity that is vital to the IRGC’s activities across the world) and nine criteria and mechanisms in place to do the same for the financing of terrorism and related activities (a core of the IRGC’s role in promoting Iran’s brand of Islam around the globe). The FATF also has swingeing powers to wield against individuals, companies, or countries who transgress any of its standards. So intent was the U.S. on eradicating the influence of the IRGC in Iran that it made it clear that even if Iran did sign up to the FATF, Washington would not remove the designation of the IRGC as an FTO immediately. Rather, it would keep the damaging designation in place for at least two years, whereupon it would be reviewed.

From the moment that the U.S. unilaterally withdrew from the JCPOA on 18 May 2018, Iran’s chief strategy was to get some sort of deal back in place – after all, the deal was good for its business and financial well-being – was to keep enriching uranium beyond the previous JCPOA agreed limit of just 3.67 percent. Tehran knew that this would cause consternation in Israel and that Tel Aviv would bring pressure on the U.S. to do something to redress the continued increases in enrichment. Iranian uranium enrichment then went past 20 percent, then 60 percent, then 80 percent and over that too. The salient point here was that Washington’s key ally in the Middle East, Israel, had become increasingly sure that Iran was no longer ‘years’ away from being able to create a nuclear weapon but rather just ‘weeks’ away – around two weeks away, in fact. On more than one occasion, according to sources in the U.S. and European Union (E.U.) energy security complexes spoken to exclusively by OilPrice.com, Israel told the U.S. that it was going to ‘decisively’ deal with the threat from Iran itself. Given the pattern of previous wars between Israel and its Arab neighbours, and the support likely to be given to the big Middle Eastern oil producers by China and Russia in the new global oil market order, the U.S. knew the danger of escalation into a superpower nuclear conflict that this might mean. 

Washington’s concerns over this scenario increased markedly after the 10 March deal between Iran and Saudi Arabia. They increased again after Israel communicated to the U.S. that following on from the opening of an Azerbaijani embassy in in Tel Aviv on 29 March this year, the two countries would be expanding their already considerable military cooperation. According to the U.S. and E.U sources, Israel has told the U.S. that up to 50 Israeli fighter jets will be based near the Azerbaijani capital of Baku as from November this year, to the north of the Iran-Azerbaijan border. This will add to the drones, surface-to-surface guided ballistic missiles, reconnaissance satellite technology, and air- and missile-defence systems with which Israel has supplied Azerbaijan in recent years. Although itself concerned about such developments, the U.S. has been quick to leverage them into pressure on Iran. 

The ongoing discussions between the U.S. and Iran about a new version of the JCPOA are not for an all-encompassing version of that original pre-2015 deal, but for a ‘limited version’ of it, according to the U.S. and E.U. sources last week. For a start, Iran will not have to commit to a specific date to sign up to the FATF, but merely indicate that it will make efforts towards aligning itself towards the FATF’s goals over an unspecified time. The U.S. will also not drop its designation of the IRGC as an FTO. However, it will allow the sanctions against Iranian oil and gas exports to be gradually rolled back. One major positive of this limited JCPOA is that it addresses the key Israeli fear regarding Iran – that the Islamic Republic manufactures a nuclear weapon of some sort sooner rather than later. Therefore, the key pledges for Iran in the new limited version of the JCPOA is that it will keep uranium enrichment at or below 60 percent and that it agrees to regular inspections once again from independent nuclear watchdogs. 

Aside from making the world a slightly safer place, at least in the short term, the new limited version JCPOA will have a significant effect on global oil prices. As highlighted by OilPrice.com last year, Iranian crude oil and condensate production could bounce back very quickly after Iran’s Petroleum Ministry orders the National Iranian Oil Company (NIOC) to ramp up production. According to a senior analyst at global energy markets intelligence company Kpler, spoken to exclusively by OilPrice.com at the time, Iran could see an 80 percent recovery of full production within six months and a 100 percent recovery within 12 months. “Ultimately, we believe Iranian production could technically jump by 1.7 million bpd including 200,000 bpd of condensate and LPG/ethane, in a 6-to-9-month period from when sanctions are lifted and an immediate impact of a 5-10 percent fall in the oil price would be likely,” the analyst concluded.

By Simon Watkins for Oilpice.com

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