Iran remains the most important geopolitical story in the oil markets as per London based investment bank Barclays."The window for finding a binding diplomatic settlement to the nuclear issue may be narrowing as Iran presses ahead with its controversial program. With his re-election behind him, President Obama appears to be making a full-court diplomatic press to find a peaceful resolution to the nuclear dispute, and his administration continues to demonstrate little public enthusiasm for another military conflict in the Middle East", the Bank noted in a report.
In February, diplomatic talks resumed between the permanent members of the UN Security Council plus Germany (P5+1) and Iran in Almaty, Kazakhstan. The main achievement of the meeting was an agreement to meet again in March and April.
The talks were generally described as constructive by all the participants, with the lead Iranian nuclear negotiator providing a particularly upbeat assessment. The Iranian enthusiasm likely stemmed from the fact that the P5+1 did seem to sweeten the deal.
The P5+1 scaled back its demand that Iran ship out its entire stockpile of 20% enriched uranium. Instead, it offered to allow Iran to retain enough higher enriched uranium to fuel the reactor at Tehran University that produces medical isotopes to treat cancer patients.
The P5+1 also dropped the demand that Iran close the heavily fortified Fordow enrichment site and, as an alternative, asked Iran to suspend higher-level enrichment activities at the facility. In return for making these concessions, the negotiators offered to remove some non-oil and non-financial sanctions.
The enhanced offer still falls short of what the Iranians had been previously demanding– ie, international recognition of the country’s right to enrich uranium at lower levels and immediate relief from the most punitive economic measures.
Hence, it remains far from certain that the leadership will actually accept the new offer, in our view, especially with the presidential election season about to enter full swing. It is also important to keep in mind that Supreme Leader Ayatollah Khamenei remains the ultimate arbiter on the nuclear file, and he has been more downbeat on the talks than either the Iranian foreign minister or lead nuclear negotiator. In an interview with the state television network, he stated
“The Westerners did not do any substantial work that could be interpreted as concessions. They minimally, admitted part of the rights of the Iranian nation, only.”
In addition, while western economic sanctions have certainly proved painful– with the rial declining by about 40% since August, oil earnings down 45% y/y, and essential goods in short supply– there is no indication that the regime is teetering on the brink of collapse.
A mass protest movement based on economic grievances has yet to emerge, and the opposition Green Movement remains essentially dormant. Hence, while the economic pain may be sufficiently high to bring the Iranians back to the bargaining table, it may not be enough to induce them to accept what they view as a sup-optimal offer.
Meanwhile, the more time that passes without a diplomatic settlement, the more progress Iran is likely to make on its nuclear program. The latest report from the International Atomic Energy Agency (IAEA) notes that Iran continues to add to its stockpile of higher enriched uranium. According to the IAEA, Iran has produced 280kg of 20% uranium, of which 113kg has been converted to reactor fuel and cannot be easily re-used for weapons-related purposes. The remaining stockpile of 167kg is below the declared Israeli redline of 240kg.
However, Iran seems to have the ability to quite rapidly augment its 20% stockpile, having added 47kg since November; hence, it could cross that redline in a relatively short period of time if it opted to do so. Adding to concerns that Iran may be deliberately slowing some activities to avert a crisis while seeking to make significant strides in other aspects of itsnuclear program, the UN inspectors reported that Iran began installing more advanced, higher speed IR-2m centrifuges at the Natanz facility in February.
The IR2-m model could allow Iran to speed up the uranium enrichment process significantly to rapidly increase its overall stockpile. In his March testimony to the Senate Selection Committee on Intelligence, the Director of National Intelligence James Clapper has indicated Iran made such technical strides in its program so that it ultimately may not be a question of capability but rather the will of Iranian leadership regarding whether to pursue nuclear weapons or not.
He stated, “These technical advancements strengthen our assessment that Iran has the scientific, technical, and industrial capacity to eventually produce nuclear weapons. This makes the central issue its political will to do so”
"If no deal is forthcoming this spring, we expect the Israeli government at a minimum to issue strong statements calling for tougher international action against Tehran. This, in turn, could put upward pressure on oil prices." Barclays said.
While President Obama will likely counsel caution, it remains an open question as to whether Netanyahu will heed his calls for restraint.
Source: Barclays