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US, Iran clash comes to UN, could spill into oil market

CNBC logo CNBC 9/24/2018 Patti Domm
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With oil bubbling higher, the United Nations this week could provide the next catalyst for prices, with both President Donald Trump and Iranian President Hassan Rouhani each speaking about U.S. sanctions on Iran.

Trump and Rouhani appear separately at the UN General Assembly in New York Tuesday, against the backdrop of already rising oil prices. Trump speaks Tuesday morning and also chairs the UN Security Council Wednesday, where he is expected to also speak about Iran.

On Monday, Brent crude jumped above $81 per barrel for the first time in four years, following a weekend meeting between OPEC ministers and Russia, where it was decided the current output agreement would remain unchanged for now. The severe decline in Venezuelan oil output has exacerbated supply concerns, which are made worse by the coming restrictions on Iranian crude.

"I think there's going to be real headline risk. I don't think Trump pulls a North Korea and tries to extend Rouhani any sort of olive branch," said John Kilduff, partner with Again Capital. "It could push oil prices up because Trump's going to be a pointed reminder of the market that Trump administration policy is maximum pressure."

Russian President Putin visits Kazakhstan: Iran's President Hassan Rouhani.© Provided by CNBC

Iran's President Hassan Rouhani.

The U.S. pulled out of the Iran nuclear agreement, known as the Joint Comprehensive Plan of Action [JCPOA], between Iran and six countries that removed economic sanctions in return for Iran's promise to end its nuclear program. However, the Trump administration opposed the agreement as one-sided and said it allowed for Iran to eventually resume its nuclear program. The other parties in the agreement remain in it, along with Iran, but the U.S. has already set plans to sanction Iran's oil business as of early November.

Analysts say about 650,000 barrels of Iranian oil has already been taken off the market. Even if European countries remain in the nuclear agreement, many companies will no longer deal with Iranian crude for fear of being kept from business dealings with the U.S. Estimates of 1 million barrels or more of Iranian crude could be off the market by year end.

"There is an increasing consensus view that supplies are going to get real tight toward the end of the year. It's almost silly season. People are talking about $100 a barrel. People are making comparison to 2007/2008," Kilduff said. "There's no real spare capacity. We're very vulnerable and there's no making up Iranian barrels."

The U.S. has also objected to Iranian meddling in the conflicts in Syria and Yemen, in which it supports rebels that are hostile to Saudi Arabia. The U.S. has also charged that Iran supports terrorist organizations such as Hezbollah and Hamas.

A terrorism attack in Iran on Sunday left more than two dozen dead and 70 injured. Iran blamed U.S. allies in the region for the attack, which was carried out by militants dressed as soldiers at a military parade in Ahvaz. A local Arab separatist group claimed responsibility.

"Trump will take the podium and i think use the same mantra that he has been repeating for the last year and a half, that Iran is the primary instigator of violence in the Middle East and only through a maximum pressure campaign can cause Iran to change its behavior significantly," said Henry Rome, Eurasia Group's Iran analyst. "I think his language will be harsh, and it will be quite a contrast because Rouhani, I think, will use this terrorist attack on the weekend to say Iran is a peaceful country and a victim of terrorism...Trump will come off not only like a broken record but on this issue, could also look quite insensitive in the face of a terrorist attack."

Helima Croft, head of commodities strategy at RBC, said the terrorist attack was one of the worst in Iran in recent history and raises the potential for escalation of hostilities in the region.

"With the Islamic Revolutionary Guards Corps warning that it will take a "deadly and unforgettable revenge" against the perpetrators, the risk of the region's cold war becoming a hot one appears to be rising in our view. We also contend that the risk of such a destabilizing clash will only grow as Iran comes to feel the full effects of economic sanctions that are designed to radically alter the behavior of the ruling regime, if not change it," said Croft, in a note.

Matthew Reed, vice president at Foreign Report, said the terror attack and Iran's blame of its neighbors should set off alarm bells in the region. "It does not bode well when the Iranians are active across the region. They have proxies everywhere," he said. "They have the resources they can call on to cause more havoc. One thing that's worth repeating...for the first time this year, Iranian leaders started threatening oil choke points beyond the Strait of Hormuz."

He said Iran will lash out at the U.S. at the UN. "That's what's expected of them at home. They can't go there and play nice. They have to defend themselves loudly and unapologetically," Reed said.

Trump chairs the 15-member security council Wednesday, and he has said it will be about Iran, though it is expected to be broader. The four other permanent members — China, France, Russia, Britain — plus Germany were parties to the Iranian nuclear agreement.

Rouhani wrote about the divide between the U.S. and its allies in a Washington Post opinion piece last week.

"The United States expected a hasty Iranian withdrawal so that it could easily forge an international alliance against Iran and automatically revive previous sanctions. Our action, instead, thwarted such a move. The talks with the remaining JCPOA participants, and their reiteration of compliance with the accord, placed the United States in a lonely position. Such a serious chasm between the United States and its European partners on a critical foreign policy matter was unique and unprecedented—which, I can say, proved that we were right in our approach to the nuclear deal and our proactive diplomacy."

Rome said Trump will look isolated.

"There's no doubt about it and he's intent on making the security council meeting Wednesday focus on Iran, the agenda of the meeting notwithstanding, and it's going to be an opportunity for the European states, as well as Russia and China to reconfirm their commitment to the deal," he said.

Rome said the Europeans have limited options, and he does expect Iran to ultimately back out of the nuclear agreement because of economic pressure from the sanctions.

Trump is "going to call again for Iran's customers to cut off the regime to stop buying Iranian oil which is only going to reinforce some of the concerns we've seen in the last couple of days about exports disappearing and there not being enough supply to make up for it," he said. "The Saudis are willing to do what it takes. They and other producers can pump more if they're called upon. They look at the end of 2019, and they see a lot of non-OPEC supply coming back, and they don't see runaway demand."

Reed said he expects a large amount of Iranian crude to be taken off the market, and the Trump administration has been slow to grant any waivers to countries that say they cannot meed demand with some supply.

"If you look at what Iran's customers are saying... its easy to imagine Iranian exports falling form 2.5 million barrels a day earlier this year to closer to 1 million barrels a day by the end of 2018," he said.

West Texas Intermediate crude futures rose Monday to $72.08 per barrel, up 1.8 percent, its highest level since July 10. Brent ended Monday at $81.20 per barrel, its highest close since Nov. 11, 2014.

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