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Commodities Corner: Why Iran’s presidential election is the ‘most important political milestone’ of 2021 for the global oil market

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Iran will hold its presidential election on Friday, and at least one analyst considers it the year’s most important political event for the oil market.

“We look at this election as the most important political milestone of 2021 for the global oil market,” said Pavel Molchanov, energy analyst at Raymond James, noting that the event has failed to garner much attention in the U.S. or international media, despite its importance.


“We look at this election as the most important political milestone of 2021 for the global oil market.”


— Pavel Molchanov, Raymond James

Iran’s current President Hassan Rouhani has been in office since 2013, but by law cannot seek a third term.

A low turnout for the elections is expected as Iran deals with the continuing pandemic, but Iranian Chief Justice Ebrahim Raisi, a protégé of Supreme Leader Ali Khamenei, appears to be the front-runner among the seven candidates running for president, according to U.S. think tank the Council on Foreign Relations. Raisi is known as a hard-liner candidate who ran against Rouhani in 2017.

“The all-but-certain victory of a hard-liner is likely to slow down the nuclear talks — and, as an off-chance scenario, might even halt them,” said Molchanov, in a research note dated Monday. “This would mean that U.S. secondary sanctions last longer, postponing the return of Iranian crude exports” of 1.5 million to 2 million barrels per day onto the global market.

Beyond that, the new leadership in Tehran is “likely to have less of a focus on economic modernization as compared to the past eight years under the moderate presidency” of Rouhani, which may eventually lead to less growth in Iran’s oil supply, he said.

A slowdown or halt in the talks, or less focus on a modernization of Iran’s oil industry, would both “point to higher, rather than lower oil prices,” said Molchanov.

On Monday, global benchmark Brent crude saw its August contract
BRNQ21,
+0.32%

BRN00,
+0.32%

settle at $72.86 a barrel, the highest front-month contract finish since April 2019. July West Texas Intermediate crude
CLN21,
+0.39%

CL.1,
+0.39%

settled Friday at $70.91, the highest since October 2018.

Unless a nuclear deal can be signed during Rouhani’s final months in office, before a new president is inaugurated in August, the “nuclear talks may need to hit a pause button,” said Molchanov. That’s significant because Iran is “capable of producing somewhere between 1.5 million and 2 million barrels per day…beyond its current run-rate of slightly more than 2 million” barrels per day, he said.

When asked by MarketWatch about the outlook for prices, Molchanov pointed out that the current futures curve is highly backwardated, with futures contracts expiring in later months trading lower than current prices.

That suggests the commodity market is expecting prices to come down from current levels over time, in part because the “expectation of rapidly recovering exports from Iran,” he said. So if an oil export recovery ends up being postponed due to a longer-than-expected nuclear talks process, it would raise oil prices three, six, or even 12 months in the future, said Molchanov.

International talks resumed Saturday in an effort to revive the 2015 nuclear deal, following the U.S. decision to withdraw from the agreement in 2018 while under the Trump administration. Senior diplomats from China, Germany, France, Russia and Britain held a 90-minute meeting with Iranian representatives in Vienna, according to the Associated Press.

The U.S. has not formally taken part in the negotiations but the Biden administration has expressed interest in restoring the deal, which could lead the U.S. to lift sanctions on Iran that has led to restrictions on its oil exports, in return for Tehran’s agreement to limit its nuclear activities.

It’s still possible “in theory” to conclude the nuclear talks and get everything signed before Rouhani steps down in a couple of months, but “past experience shows that the nuclear talks tend to move at a snail’s pace, even without political complications,” said Molchanov.

It’s possible to see a suspension of the talks altogether, which would be a “rather extreme scenario,” he said, and would depend on what Raisi says after the election and how his administration behaves in its early days.

When Raisi ran against Rouhani in 2017, Raisi said he saw the “activation of a resistance economy as the only way to end poverty and deprivation in the country,” according to Molchanov, who explained that the term “resistance economy” is comparable to autarky — “insulating domestic industries from international pressure and competition.”

If a government under Raisi follows that path, the result would be a “continuation of protectionism and lackluster foreign investment,” and Iran’s oil industry would continue to suffer from a “lack of international capital and technology transfer,” Molchanov said.

Even if sanctions disappeared entirely under a nuclear deal, Iran would need to provide “sweeteners” for big oil companies to accept the heightened risk of investing there, he said. “Raisi seems very unlikely to do that so Iran’s ability to expand oil production on an organic basis over the long run…would be substantially constrained.”

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