As Oil Rally Fades, Trump's Iran Hawk Pick Seen Aiding Bulls

(Bloomberg) -- For those in the oil market, it may seem like there’s no end to U.S. events determining the course of prices these days. Donald Trump’s sudden firing of Rex Tillerson is unlikely to prove an exception.

The president’s decision to nominate CIA Director Mike Pompeo as Secretary of State to replace the former Exxon Mobil Corp. chief executive may have big ramifications for the crude market, according to Fereidun Fesharaki, chairman of energy consultant FGE. That’s because Trump’s pick for America’s top foreign diplomat is an Iran hawk whose appointment raises the prospect of unilateral U.S. sanctions that target the OPEC member’s oil sales.

Oil investors are increasingly being whipsawed by events in the U.S., be it surging American output or Trump’s planned tariffs on steel imports that raised the potential for crude pipelines to turn costlier. Booming shale supplies are currently threatening to undo a rally in prices in spite of efforts by the Organization of Petroleum Exporting Countries to curb output and clear a glut.

Now, Trump’s latest move is heightening speculation that the U.S. will withdraw from a deal between world powers and Iran, under which international sanctions against the Middle East nation were eased in exchange for it agreeing to curb its nuclear program. That’s spurred jitters across markets.

“The choice of Mike Pompeo as new Secretary of State potentially has major implications for the oil market,” said Fesharaki, a former energy adviser to the Iranian government. “While Tillerson was seen as one of the voices of restraint in terms of relations with Iran, Pompeo is one of the most outspoken critics of the Iran nuclear deal,” he said in an emailed note on Wednesday.

Oil was initially lifted by the Tillerson news on Tuesday, before resuming declines. West Texas Intermediate crude prices were up 0.5 percent at about $61 a barrel at 10:24 a.m. in London on Wednesday, after having dropped from over $66 in January. Futures are still up more than 40 percent from late June.

Also read Gadfly’s take on what Tillerson’s exit means for the oil market

While there’s a high likelihood roadblocks for Iran will be created, Fesharaki says the probability of a collapse in the nuclear accord is about 20 percent. Should that happen, the Middle East nation’s liquid exports could be cut by 1.5 million barrels a day, resulting in substantial oil price increases, he said. Only Saudi Arabia can mitigate the impact from reduced Iranian exports, he said.

To contact the reporter on this story: Sharon Cho in Singapore at ccho28@bloomberg.net.

To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net, Anna Kitanaka

©2018 Bloomberg L.P.