(Bloomberg) -- President Donald Trump’s withdrawal from the Iran nuclear deal seems to have finally gotten the attention of some folks at the back of the oil market.
The day after the president’s announcement, Brent crude-oil swaps for 2018 all the way through 2022 were higher than $60 a barrel for the first time since November 2015:
A hallmark of the period since oil prices crashed is the stubborn sanguinity of long-dated oil futures prices. Since oil bottomed in early 2016, even as near-dated prices have bounced around, swaps for 2020 and beyond have tended to stick to a fairly narrow range anchored around $55.
One explanation is that $55 was seen by many as the marginal cost of production in the Permian basin; so if prices rose above that level, then new shale supply would ultimately tamp them down again. Futures prices, especially those in the thinner-traded outer reaches, aren’t forecasts. And the upward pressure in the nearer part of the oil futures curve is bound to tug on the back end at some point.
Still, the move out of the $50s for 2020-plus futures is a notable development, mostly because it chimes with something that occurred to me as I listened to the president on Tuesday.
Many focus, quite rightly, on quantifying the impact on Iranian crude-oil exports over the next year or so — no easy task, given the multiple paths that can be taken by Iran and the other signatories nominally sticking with the deal.
What struck me, though, was the sheer hawkishness of the speech. While it ended with the president holding out the offer of another potential deal to be struck with Tehran, the substance, tone and impact of the speech effectively undercut the prospect of that happening. Taking the president at his word, any new deal would need to not merely stifle Iran’s nuclear ambitions, but also its missile testing and pretty much its entire foreign policy across the Middle East. The phrase “regime change” was unspoken but audible nonetheless.
Those may be worthwhile goals, but the likelihood that they will be achieved via diplomacy alone is low. As John Bolton, the newly installed National Security Advisor, put it in an Op-Ed he penned for the New York Times in 2015 titled “To Stop Iran’s Bomb, Bomb Iran”:
The inconvenient truth is that only military action like Israel’s 1981 attack on Saddam Hussein’s Osirak reactor in Iraq or its 2007 destruction of a Syrian reactor, designed and built by North Korea, can accomplish what is required. Time is terribly short, but a strike can still succeed.
The point for oil watchers is that, whatever happens with flows in the immediate future, the risk of a far more serious confrontation and disruption just got ratcheted up.
As I wrote here, America’s relationship with much of the world — not just the Middle East — is being radically reset. Whatever your opinion about the desirability of that, what is indisputable is that the global oil market is largely a construct of the old relationship model. Tearing up the Iran deal isn’t just a reset of U.S. relations with that country, but also with European allies, China and Russia — and all at a time when other disputes over things like trade, electoral interference, and paying for NATO are bubbling away. Risk is on, as those longer-dated swaps help to illustrate.
For Saudi Arabia, renewed U.S. pressure on Iran fulfills primary foreign policy goals and, of course, helps on the revenue front. If Iranian barrels are taken off the market again, then it will join the other sick men of OPEC — Venezuela, Libya and Nigeria — from whose persistent problems the organization’s other members can profit.
The move up in longer-dated prices also sends a signal to oil companies to invest (except maybe in Iran). Saudi Arabia has argued that higher oil prices are needed to insure investment in future supply (there’s also a certain IPO lurking in the wings that could really use higher long-term price assumptions). They may well be happening. On the same day the president pulled America out of its deal, the Department of Energy issued its latest projections for U.S. oil production. These have gone up — a lot:
While higher spot prices help to fill coffers in Riyadh, higher forward prices support hedging by U.S. producers (they ultimately hurt demand, too). The return of geopolitics to the front of mind at the back end of the market signals a step-change in risks, and fundamentals will start to shift accordingly.
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