The price of crude oil tanked by more than 4% yesterday after US Secretary of the State, Mike Pompeo said that Iran had approached the US for talks. He did not share more details on this but it came a day when the Iranian Foreign Minister, Javad Zarif was in the United States. This was interpreted to mean that he was the conveyor of the news from the Iranian president.
Iran and the United States have been at loggerheads for the past one year after the US exited the Joint Comprehensive Plan of Action (JCPOA). This was a comprehensive deal that was negotiated in a period of more than ten years. In the end, Iran pledged not to continue pursuing the development of the nuclear weapons on the condition that all sanctions were lifted.
The deal was announced in 2015, at the height of the US election campaign. With the divisions between the democrats and the republicans, the latter moved to oppose the deal. The issue was exacerbated when an aircraft carrying millions of dollars in cash was seen being offloaded in Tehran. These were Iranian funds that were held in the US when the sanctions kicked in. This became a major talking point among the conservatives.
Last year, Donald Trump announced that the US was leaving the nuclear deal. It is well known that the president had not read the deal and the details that were put in place. In his statement, he said that Iran was uncompliant, even though independent agencies found that it was complying. He also said that the deal did not address the Iranian missile program and its sponsoring of terrorism.
Iran has always accused the west for these claims. On the missiles program, Iran argues that they are there for national security reasons. It argues that it has to have the missiles to protect itself against Israel, which is an American ally known for having hundreds of nuclear weapons.
Today, Iran is one of the most sanctioned country in the world after North Korea. This has seen its economy suffer and the unemployment rate increase to 12.8%. The country’s oil exports have declined from more than 2.5 million barrels a day to just over 200k. The anxiety in the country has increased too.
Therefore, the news that Iran and the US were close to talks was received well by the market. However, this meant that the price of crude oil had to drop because Iran has insisted that the talks will only happen if the US removes the sanctions that have been in place.
However, traders should be careful because the negotiation issue is still in its infancy. There are three reasons for this. First, Iran has said that the missile program is not negotiable. This could be a turn-off to the US. Second, there is no mutual respect between the two sides. Third, if there will be talks, they will likely take months to conclude. Therefore, there is a likelihood that the price of crude could resume the upward trend.