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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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What’s Next For Iran, The Nuclear Deal, And The Oil Price After Israeli Attacks?

  • U.S.-Iran nuclear talks collapsed after Israel's unprecedented strikes on Iran, leaving future negotiations uncertain amid rising geopolitical tensions.
  • Iran perceives U.S. complicity in the Israeli attacks and recognizes it can no longer pursue deceptive diplomatic strategies that previously undermined nuclear agreements.
  • A ‘small disruption’ in global oil supply – reduced by 500,000 to 2 million bpd, would only see a small hike in oil prices.
Iran oil

Unsurprisingly following Israel’s largest-ever military strikes against Iran over the weekend, none of the scheduled talks for Sunday between the Islamic Republic and the U.S. over a new Joint Comprehensive Plan of Action (JCPOA, or colloquially ‘the nuclear deal’) took place. Iranian Ministry of Foreign Affairs spokesperson Esmaeil Baghaei said that: “The other side [the U.S.] acted in a way that makes dialogue meaningless [...] You cannot claim to negotiate and at the same time divide work by allowing the Zionist regime [Israel] to target Iran’s territory.” For its part the U.S. confirmed that the talks were off but added that: “We remain committed to talks and hope the Iranians will come to the table soon.” As oil prices jumped higher in response to these escalating tensions in Iran and the wider Middle East, the key question for the markets is what happens next in both contexts?

Although the U.S. has made it clear that none of its regular servicemen and women were involved in the weekend attacks on Iran, it is equally clear to Tehran’s senior leadership that Washington knew what was going to happen and did not obstruct these longstanding plans by Israel. Prior to the first wave of Israeli attacks, the U.S. on 12 June ordered its personnel out of key areas in the Middle East – including Iran’s neighbour Iraq, and Bahrain and Kuwait – as President Donald Trump said that the Middle East “could be a dangerous place”. It is also the view of these senior Iranians now that the JCPOA talks scheduled for Sunday in Oman were simply a distraction ploy from the Israeli attacks that began the preceding Friday, to catch Iran off-guard, a senior source who works closely with Iran’s Petroleum Ministry exclusively told OilPrice.com over the weekend. After all, just last month, Trump had dismissed notions of pre-emptive Israeli strikes on Iran as groundless and had said that the route to a diplomatic solution was still available in the talks on 14 June. That said, he had also made it clear at that point that Iran had “60 days” to agree to full dismantlement of their nuclear programme and zero enrichment of any uranium. On Friday following the Israeli attacks he said: “I gave them 60 days, and they didn’t meet it – today’s 61.”

Related: Oil Prices Surge as Israel and Iran Target Each Other’s Energy Infrastructure

Given this, Iran will be in no doubt now that the scope for it to do what it was going to do at the 12 June talks – agree to whatever the U.S. had put into the latest draft, while not intending to implement any of the key points – is no longer an option for future talks. “Tehran now knows that this strategy which it used for the 2015 [JCPOA] deal and was trying to work under [former U.S. President Joe] Biden is not going to work with Trump, so it is going to face some very tough decisions, and the result of these will either be the removal of the current [Iranian] President or the dismantling of the IRGC [Islamic Revolutionary Guards Corps],” said the Iran source. The reason why this is the case is that the key conditions in Trump’s new draft JCPOA are aimed at destroying the financial and political powerbase of the IRGC – the guardians of the Iranian Islamic Revolution of 1979. This, in turn, is a cornerstone of U.S. plans to nullify the influence of the ultrahard-Shia influence across Iran’s key religious and political structures or to catalyse a change of regime. That was precisely why former longstanding President Hassan Rouhani lost his mandate for power in his second term in office, as the IRGC pushed back against these intended reforms, as analysed in full in my latest book on the new global oil market order.

 

Aside from the issue of what constitutes an acceptable level of uranium enrichment on both sides – now conclusively answered as ‘none at all’ by the U.S. – the main issue from the IRGC’s side has been a commitment by Iran to adopt the principles of the Financial Action Task Force (FATF). The FATF has 40 active criteria and mechanisms in place to prevent money laundering -- an activity that is vital to the IRGC’s activities across the world. It also has nine criteria and mechanisms in place to do the same for the financing of terrorism and related activities -- again, 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 and is extremely aggressive in using them by degrees, depending on whether the sanctioned entity is on its ‘grey’ or ‘black’ list. These would include multiple new financial sanctions on companies and individuals and increased surveillance by a plethora of agencies from or connected to the original ‘P5+1’ signatories of the 2015 JCPOA – the U.S., the U.K., France, Russia, and China, plus Germany. The IRGC -- correctly -- sees the provisions of the FATF as instruments to remove the financing it gains from its multitude of holdings across hundreds of Iranian companies and international firms associated with them, together with the enormous political influence that these additionally bring to it, as also detailed in full in my latest book on the new global oil market order.

The short-term ability of the IRGC and related military units, especially its clandestine foreign wing Al Quds – has been significantly damaged by the killing of several of its top leaders in the weekend attacks. These included Mohammad Bagheri Bagheri (the chief of staff of Iran’s armed forces – including the IRGC and the Army), Hossein Salami (the commander-in-chief of the IRGC), Gholamali Rashid (head of the IRGC’s Khatam-al Anbiya Central Headquarters, which coordinates joint Iranian military operations and is also a key player in its commercial and financial operations), Amir Ali Hajizadeh (commander of the IRGC’s Aerospace Force, in charge of its missiles programme), and several of the top figures in Iran’s nuclear programme (including Fereydoun Abbasi and Mohammad Mehdi Tehranchi). In addition, the Israeli attacks have taken out a series of key sites in this programme, most notably the above-ground nuclear facility at Natanz. It seems likely that Israel will look to destroy the deep-underground nuclear facilities at Fordow too, provided they have the 30,000 pound+ bombs to do it. The U.S. has not revealed whether such weaponry has been given to Israel, but it would be surprising if it has not. Therefore, it would seem like an offer of JCPOA talks again from the U.S. in the not-too-distant future – and a quick deal based on Washington’s terms – would firmly be in the ‘offer that cannot be refused’ variety of proposals.

As for the widening out of the Iran-Israel conflict across the rest of the Middle East, Trump and his team had already laid the groundwork for a relatively mooted response. The President concluded a recent whirlwind tour of key powers in region with various major deals with Saudi Arabia – a longtime adversary of Iran, and the key Sunni Islam power against Iran’s Shia Islam leadership role. Similar commercial deals are in the offing between the U.S. and Qatar, the United Arab Emirates and others, all of which have long seen the prospect of a nuclear Iran with as much unease as much of the rest of the world. Despite Iran’s call over the weekend for a united Islamic Army to fight against Israel -- featuring Iran, Turkey, Saudi Arabia and Pakistan, among others -- no significant gestures of support for the idea have been noted. Moreover, no significant disruption to Iranian oil supplies has been publicly reported or privately communicated to OilPrice.com, and there has been no significant disruption in oil supply routes either.

That said, if there is a widening out of the conflict – most likely in the first instance through mechanisms connected to oil supply – then the World Bank recently illustrated how these might pan out in price terms. A ‘small disruption’ in global oil supply – reduced by 500,000 to 2 million bpd (roughly the same as the decrease seen during the Libyan civil war in 2011) – would see the oil price initially rise 3-13%. A ‘medium disruption’ – involving a 3 million to 5 million bpd loss of supply (roughly equivalent to the Iraq war in 2003) would drive the oil price up by 21-35%. And a ‘large disruption’ – featuring a supply fall of 6 million to 8 million bpd (like the drop seen in the 1973 Oil Crisis) – would push the oil price up 56-75%.

By Simon Watkins for Oilprice.com

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