Iran Talks 'Will Fail'; Oil Risk Prevails: Roubini Analyst

International talks scheduled later this month aimed at curbing Iran's nuclear program "will fail", boosting the risk premium in global oil prices, Roubini Global Economics said this week.

View of Iran's oil industry installations in Mahshahr, Khuzestan province, southern Iran.
Kaveh Kazemi | Getty Images
View of Iran's oil industry installations in Mahshahr, Khuzestan province, southern Iran.

Although public statements from Iran, the second-biggest producer of the Organization of Petroleum Exporting Countries, have cooled in recent weeks, and the country appeared willing to engage on its nuclear program at April 14 talks, "we believe this reprieve to be only temporary," wrote Gary Clark, Commodities Strategist at Roubini Global Economics, co-founded by Nouriel Roubini, the economist who predicted the 2008 financial crisis

Ultimately, the next round of talks "scheduled for May 23 in Baghdad, will fail, as they have over the past nine years, with Iran unwilling to compromise enough and Israel asking for too much: an immediate cessation of enrichment, the removal of enrichment materials and the dismantling of the nuclear facility in Qom," Clark said.

The U.S. and its allies have held Iran under tightening sanction pressures since 2010 to force the country to abandon its uranium enrichment program which Tehran maintains is being developed for peaceful purposes. The European Union will tighten sanctions further starting July 1 with an embargo of Iranian crude oil.

"The possibility — albeit small — of a military strike" remains on the table, RGE's Clark said, as sanctions come into effect, which “equates to a large, if not rising, risk premium built into the price of crude."

Oil sanctions against Iran — when they become effective from July 1 — rather than the risk of war, will be the main driver building the risk premium in the oil price, argues Michael Wittner, Global Head of Oil Research in the Commodities Research team at Societe Generale.

"The U.S. and EU will not easily suspend these sanctions, even if a framework for agreement is reached," Wittner said in a note on May 8. "The fundamental impact of these sanctions — tighter space capacity, as the Saudis replace Iranian crude — is a key reason for our bullish view on the markets going forward."

Israel Unity Deal

A study of nearly 800 institutional investors conducted by the Economist Intelligence Unit and released this week found the main risk to the global recovery is the threat of an oil price spike, tied in part to tensions over Iran's nuclear program.

Assuming a military confrontation between Iran, Israel and the U.S. — specifically, an attack on Iran's nuclear facilities — does take place, the EIU forecasts a "severe oil price spike amounting to a 30-50 percent jump in prices in a matter of days or weeks, halting the global economic recovery and threatening another recession."

However, recent political developments in Israel, which has yet to rule out military action against Iran, suggest tensions may ease. Prime Minister Benjamin Netanyahu this week formed a broad coalition government with the centrist Kadima party led by former defense chief Shaul Mofaz, in a political surprise that avoided an early election.

The agreement to form an enlarged coalition in Israel's parliament, the Knesset, will "significantly lower the probability of an Israeli strike against Iran this year," said Alastair Newton, Senior Political Analyst at Nomura International.

Though Mofaz comes from a strong defense background as a former Chief of Staff of the Israeli Defence Force (IDF) and defense minister, "he also comes with a different view on Iran to that which Mr. Netanyahu has been offering," Newton wrote in note on May 8.

"Mr. Mofaz has publicly expressed skepticism on more than one occasion over a possible Israeli military strike against Iran's nuclear program. We therefore believe that Mr. Mofaz is likely to take with him into the security cabinet dissenting opinions to Mr. Netanyahu's over Iran's nuclear ambitions, similar to those recently expressed by a number of former senior IDF and security/intelligence staff and, perhaps most tellingly, by the IDF's current chief of staff, General Benny Gantz."

Israel's military chief said he does not believe Iran will decide to build an atomic bomb and called its leaders "very rational" — comments that clashed with Prime Minister Netanyahu's assessment, in an interview published on April 25 in the left-wing Haaretz newspaper.

Newton described these recent developments in Israel as "consistent with reducing geopolitical tensions around Iran and therefore further easing for now upward pressure on the price of Brent related to perceived geopolitical risk."

Riccardo Fabiani, Middle East analyst at global political risk research and consulting firm Eurasia Group, agreed that the formation of national unity government in Israel "reaffirms our view that the likelihood of a military strike before the end of 2012 remains low...Iran's nuclear program has not reached its final stage, which would be a primary trigger of Israeli strikes."