The deal with Iran to curb its nuclear program was been officially signed by all parties on Tuesday, but it still must be approved by the national governments involved. A recent report from Barclays Cross Asset Research highlights that this means there is still some uncertainty regarding if and when the sanctions on Iran will be lifted and Iranian crude start flowing again.
Lingering uncertainties remain
The first point Barclays analysts Alia Mubayed and Michael Cohen make is that uncertainties about Iran’s compliance with the terms of the deal will likely mean that sanctions relief will not be confirmed until at least 4-6 months from the signing of the agreement. Questions that still have to be answered include: How will the impending review of the proposed Iran deal by Congress end up and how would a phased implementation work? Despite the uncertainty surrounding the Iran nuclear deal, it is likely to have a major impact on energy and financial markets for a number of reasons.
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U.S. Congress is potential roadblock
The Iran deal is structured in three phases: the “adoption of agreement”, the “operationalization of the agreement” and implementation of the deal. The operationalization phase was included because of the Corker-Cardin Act to enable the U.S. Congress to review the agreement. In this phase, all of the partners will circulate the agreement among their governments.
The Corker-Cardin Act mandates that the sanctions against Iran cannot be lifted during the 60-day Congressional review period.
After the review of the Iran deal, if Congress passes a joint resolution of disapproval, the sanctions on Iran will remain in place for at least 12 days. If the president vetoes the joint resolution, as he has vowed to do, sanctions may not be lifted for another 10 days after the veto. If Congress overrides the presidential veto, which would require a super majority of votes, then presumably the sanctions would remain in place, but not all legal scholars agree on this point.
If Congress comes out in support of the agreement and passes a joint resolution in favor of it (or if no resolution of disapproval is passed in the review period), then the sanctions will be lifted.
Given the current partisan state of U.S, politics and all of the posturing for the upcoming 2016 presidential election, Mubayed and Cohen argue that “there is a significant chance the US Congress will disapprove of the deal requiring the president to veto Congressional legislation.” While the President likely has enough votes to over-ride the veto, the Iran deal could become another political hot potato pitting liberal democrats and libertarians against moderate democrats and most Republicans.
Impact of Iran deal on energy and financial markets
Mubayed and Cohen argue that “Iran’s energy abundance matters: in the short term, the country’s return could prolong the situation of an oversupplied oil market and benefit European refineries; in the long term, Iran’s energy sector represents a new investment opportunity for IOCs, though they are likely to approach this opportunity with caution.”
Keep in mind that Iran holds 10% of proven global oil reserves, making it the fourth-largest reserve holder worldwide. It is also one of the top three OPEC oil producers. Iran’s natural gas reserves are second only to Russia globally and account and represent close to 20% of total worldwide gas reserves.
The Barclays analysts suggest that Iran will look to sell its stored oil to Asian markets when sanctions are lifted. They believe the prospect of a real roll back of sanctions will weigh on sentiment in the oil market. They also highlight notable constraints on Iran’s ability increase its oil and gas production, pointing out that Iran’s exports will not be that large as its domestic economy revs up and the Iranians look to export value-added products.
The Iran deal will also dramatically change the security and geopolitical environment in the Middle East. The Western powers believe that a deal was the only realistic way to delay Iran’s drive for a nuclear weapon.
Arab countries especially in the Gulf, however, remain skeptical about Iran and want assurances from U.S. and European partners, and are also taking steps to improve their own security. President Obama reiterated his commitment to the security of U.S. allies in the Gulf in late May, and said he planned to “further strengthen security cooperation”, and work with regional allies to counter Iran’s meddling. However, after recent disputes with the Obama administration on topics like Syria, it will be hard to regain trust through words. That said, there is little any country in the region can do to stop the agreement from implementation.
According to Mubayed and Cohen, the now even more complex and fragile political environment in the Middle East may lead to more volatile oil prices. “If such efforts by the Gulf countries bring about further conflict or exacerbate activities regional tensions and sectarian violence, this will likely raise the market risk premium. Although oil is in a state of oversupply, the possible combination of heightened political tension and a tighter market balance might create a more volatile market environment.” Although an outright attack on Iran is unlikely, chaos caused by terrorist Shia and Sunni proxy groups in Syria, Iraq or Yemen could lead to further intervention and escalation. However, with slow global economic growth and record oil output from Saudi Arabia, this point likely will remain moot in the short term.