Total’s message on Wednesday that it will pull out of the Iranian South Pars project unless it gets a project waiver for US Iranian sanctions rolled on in the market yesterday and helped to drive Brent to $80/bl. It confirmed that European companies with business and banking activities in the US cannot afford to go up against the US Iran sanctions unless they get assurances against possible secondary sanctions for their US activities. But more importantly in our view it confirmed that Total probably do not think that the US – Iran situation will blow over any time soon. If Total had believed that within a year or so there would emerge a new Iran nuclear deal replacing the current JCPOA they would probably have chosen to place investments on hold till then and just wait it out. Pulling out of South Pars (unless getting a waiver) is basically saying: “There is no solution in sight for a long period”. The chance for Total of getting such waivers is probably low as the US is looking for maximum sanctions impact. To us it seems unlikely that we’ll see a new Iran nuclear deal any time soon. It looks more like the US together with Israel and Saudi Arabia wants to curb Iran’s growing political influence in the Middle East as much as possible for as long as possible rather than looking for a new Nuclear deal which is acceptable for Iran. This could lead to an escalating radicalization in Iran and possible revival of Iran’s enrichment of Uranium which again would lead to more sanctions with the EU possibly ending up joining the US sanctions again in the end.
Price action – Breaking $80/bl but longer dated contracts gained more
The Brent crude front month contract had an intraday gain of 1.5% yesterday as it broke above the $80/bl barrier for the first time since 2014 to a high of the day of $80.5/bl. Towards the end of the day it fell back again to a gain on the day of only two cents with a close of $79.3/bl. The longer dated 36 months Brent contract however ended the day with a gain of 0.9% at $66.62/bl. While the front month Brent contract now has moved back to the highest level since November 2014 the longer dated contracts are still lagging significantly behind. The rolling 36 months Brent contract still needs to add another $10/bl to before it gets back to “highest since 2014”. A projected tightening forward balance due to Iran, Venezuela and Angola with current active OPEC+ cuts of 1.8 m bl/d all gone in 2019 is probably helping to drive up the longer dated contracts. We think there is more to go for the longer date contracts. This will send very positive price signals into the whole oil space with higher confidence, optimism and evaluations as a likely consequence.