LONDON, Feb 23 (Reuters) – Iran-US nuclear talks are nearing the finish line with a soon-awaited announcement of a new deal to lift sanctions in exchange for renewed controls on uranium enrichment.
Diplomats have begun leaking some details to journalists in a bid to prepare lawmakers, opinion-makers and voters for the looming compromise (“US moves closer to return to Iran nuclear deal,” Wall Street Journal, February 21).
The negotiations come amid the tightest oil market in over a decade and deteriorating relations between the United States and its allies and Russia.
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US and European negotiators are likely to insist that there is no connection between the nuclear talks, soaring oil prices and the deepening confrontation with Russia over Ukraine; the “files” are completely separate.
In practice, leaders have to consider the whole diplomatic, political and economic situation, setting priorities and making compromises, which in this case makes a nuclear deal more attractive.
The changing international landscape, looming oil shortages, accelerating inflation, and political fallout in North America and Europe have all increased incentives to push the deal across the line.
FEAR OF INFLATION
Enforcement of existing sanctions has already eased over the past 12 months as increasing volumes of Iranian crude oil were shipped to China (“As nuclear talks resume, Iran’s oil exports soar,” Reuters, February 10).
One reason for this is likely to generate goodwill during negotiations, build trust among negotiators, and demonstrate some of the tangible benefits that will result from an agreement.
However, with the oil market chronically undersupplied since mid-2020 and inventories now below the five-year pre-pandemic average, oil importers are now requiring more Iranian barrels than before.
A tightening of enforcement of sanctions during negotiations or as a result of a failed agreement would push the market into an even more severe tightening, causing prices to rise even faster and inflation to be worsened.
With US shale producers and other members of the expanded OPEC+ group of big oil exporters unable or unwilling to further ramp up production, the market needs additional Iranian oil to stave off a price spike.
The volume of Iran’s production is classified, but the US Energy Information Administration estimates it was about 2.5 million b/d as of January 2022 (Short-term energy outlook, EIA, February 8).
Production has increased from less than 2.0 million barrels per day in January 2020 (when sanctions enforcement was tightened) but is still below 3.8 million barrels per day in January 2018 (before sanctions were re-imposed) .
Without a sharp rise in prices, the global oil market could not afford to lose 0.5 million b/d or more as a result of tighter sanctions enforcement if negotiations fail to reach an agreement.
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If sanctions are eased, the phased addition of up to 1.3 million b/d of additional oil over the remainder of 2022 and into 2023 could help stabilize global inventories and prevent prices from rising further .
Inflation has emerged as the top economic and political concern for consumers and voters in the United States and Europe, forcing policymakers to explore ways to limit price increases, including allowing more Iranian oil sales.
For US and European leaders concerned about rising costs of gasoline, diesel, gas and electricity and the impact on the cost of living and voters, the incentives to reach an agreement to lift sanctions are strong become.
The sharp deterioration in relations between the United States and European countries on the one hand, and Russia on the other, has also increased the incentives to resolve the nuclear talks and sanctions issue.
US politicians have insisted that sanctions on Russia “do not target oil and gas flows,” according to a State Department briefing to journalists (“US sanctions on Russia not targeting energy markets,” Reuters, March 22, 2009). February).
But deteriorating diplomatic and economic relations with one of the world’s top three oil and gas exporters are inevitably adding to the uncertainty and could push prices higher.
The US-Russia conflict over Ukraine has already prompted Russia to align itself more closely with China as the Russian government seeks diplomatic, financial and economic support in the face of US sanctions.
This risks thwarting long-term US efforts to separate the two Eurasian powers to focus on containing the rise of China, seen as a more formidable competitor and adversary.
In the short term, US diplomatic strategy seems intent on not pushing the two powers closer together than necessary (“Bond between China and Russia alarms US and Europe amid Ukraine Crisis,” New York Times, February 20).
So, imposing sanctions on Chinese companies for violating US bans on importing oil from Iran has become more problematic as it would exacerbate diplomatic tensions in another relationship.
Broadly speaking, the United States is locked in three major conflicts, with China, Russia and Iran, which is more than the White House can handle at once and is taxing military, diplomatic and economic resources.
The prioritization implies that US policymakers must focus on the immediate political issue (Russia) and their long-term top priority (China), while de-escalating a conflict is neither urgent nor top priority (Iran).
For all these reasons, the time has come for a renewed deal between the United States and its allies and Iran, trading sanctions relaxation for limits on enrichment and other nuclear activities.
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Oil Price Outlook 2022/23: https://tmsnrt.rs/3JG9iLY
John Kemp is a market analyst at Reuters. The views expressed are his own.
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Edited by Elaine Hardcastle
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