Iran: A “Framework” that Matters to Oil

Published on March 31, 2015
SGH Insight
" While a “Framework Understanding” announcement may be weaker than the signed “Framework Agreement” that was hoped for today, where it matters for markets, it may end up being far more significant than is being widely assumed."
Market Validation
(National Post 04/02/15) "Crude oil futures extended losses after Iran and world powers said they reached an outline accord that keeps them on track to end a decade-long nuclear dispute. Brent slid as much as 5.4% in London, while West Texas Intermediate crude dropped 4% in New York."

Reports are starting to leak out of Lausanne, Switzerland that Iran and the “P5+1” group consisting of the US, UK, France, Germany, Russia, and China may be preparing to announce a “Framework Understanding” on the nuclear arms negotiations today, on the cusp of the self-imposed March 31 midnight deadline, with details, as originally envisioned, to be hammered out by the end of June.

The bulk of the reporting and post-mortem analysis is now likely to focus on the response from Congress and Tel Aviv to what will in effect represent an interim marker in the eighteen month long negotiating process, and the significant obstacles that remain to reaching a final agreement – restrictions on Iran’s Research and Development, the ultimate duration of a deal, and a continued impasse over the staging of any sanctions relief versus the immediate relief demanded by Tehran (see SGH 3/13/15, “Iran: On the Cusp of a Nuclear Deal”).

*** It appears to us, however, that some significant progress may in fact already have been made behind the scenes on at least the broad principles governing the all-important sanctions relief negotiations that will dictate if and when additional Iranian oil ultimately hits the markets. ***

*** Reports out of Iran indicate that the sanctions negotiations have moved on from the timetable of sanctions relief to negotiations over drafting a new UN Chapter VII Resolution that would remove existing sanctions and outline the various obligations of each party, with the major sticking points now remaining over when and how sanctions would be restored, either automatically, or after arbitration, down the road were Iran to break its side of the accord. ***

*** This implies, critically, that the actual sanctions relief schedule may be faster than markets may expect, and that de facto Iranian oil may hit markets – as much as 600,000 barrels a day according to estimates by a former Aramco executive – in a matter of months upon the signing of a deal. ***

** The reversibility of any sanctions relief is critical for the Obama Administration to win Congressional approval, but this is exactly why Iran has focused all its immediate efforts on gaining relief from the UN sanctions regime, and not on the bilateral restrictions imposed by the EU, administratively by the US Treasury and White House, or through legislation by the US Congress. The UN measures have been targeted by Tehran effectively as the “legal umbrella” for all the other sanctions, and perhaps even more importantly, as the key to global cohesion. ***

The willingness reported out of Tehran by the P5+1 to grant a relatively accelerated concession on the timing of sanctions relief so long as the reversibility is maintained appears to be borne out by comments from not just Russia’ Foreign Minister Sergei Lavrov but German Foreign Minister Frank-Walter Steinmeier as well, with both indicating an understanding of Tehran’s desire to see a rapid thaw in economic and financial restrictions upon the conclusion of a deal.

And so while a “Framework Understanding” announcement may be weaker than the signed “Framework Agreement” that was hoped for today, where it matters for markets, it may end up being far more significant than is being widely assumed.

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