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Briefing highlights

* Oil’s ‘fear premium’ in play

* Crude prices jump, WTI above $70

* Global markets mixed so far

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* Oil buoys energy stocks

* New York poised for stronger open

* Canadian dollar above 77.5 cents

Oil’s ‘fear premium’

There’s a lot to play out yet, but oil’s “fear premium” likely will rise depending on how Iran responds to U.S. President Donald Trump’s aggressive stance on Tehran’s multi-nation nuclear pact.

And it’s far from simple, given the dynamics in Tehran.

Mr. Trump did the expected Tuesday in ignoring the pleas of European leaders and pulling the United States out of the nuclear deal, which waived sanctions in return for restrictions on Iran’s nuclear program.

But his stance was “much tougher” than expected and, thus, there could now be a new dynamic, said Helima Croft, Royal Bank of Canada’s global head of commodity strategy in New York.

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Oil prices popped today, with West Texas intermediate, the U.S. benchmark, back above US$70 a barrel in reaction to the U.S. withdrawal from the Joint Comprehensive Plan of Action, or JCPOA.

President Donald Trump holds up a proclamation declaring his intention to withdraw from the JCPOA Iran nuclear agreement, May 8, 2018.

JONATHAN ERNST/Reuters

Markets, Ms. Croft said in an interview, are focusing on the number of barrels at play, which other observers estimate could be 500,000 a day or more in lost Iranian exports. And the overall impact could be far higher.

But key to all this is that President Hassan Rouhani doesn’t control Iran’s nuclear program, and what’s important is the response of Supreme Leader Ayatollah Ali Khamenei and the Revolutionary Guard.

And whether Mr. Rouhani is now discredited.

That “fear premium” could rise if Iran responds by restarting its nuclear program to quickly reach “weapons breakout capability,” warned Ms. Croft and her colleagues, RBC commodity strategists Christopher Louney and Michael Tran.

“There were always powerful elements in the leadership – principally, the revolutionary guards – that opposed the agreement, and they will likely push for an end to the restrictions,” they said.

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“For now, oil market participants are principally focused on the barrel count risk entailed in a JCPOA exit, but we contend that the stakes are, in fact, much higher.”

That came in a report that preceded, but anticipated, Mr. Trump’s move. And, Ms. Croft said, it’s even more likely now that that premium will climb.

“Saudi’s Crown Prince has already warned that the Kingdom will opt for its own nuclear program in the event that Iran does pursue nuclear weapons capabilities – raising the prospect of a Middle East arms race,” Ms. Croft, Mr. Louney and Mr. Tran said in their report.

“Israel’s reaction in such a scenario will also be critical, especially as it has recently stepped up air strikes on Iranian military facilities in Syria,” they added.

“Perhaps Iran will play it safe and remain largely compliant with the terms of the JCPOA in order to garner international sympathy. However, senior Iranian officials have recently pledged to resume suspended nuclear work (including enriching uranium at high levels and spinning high-speed centrifuge devices) if the U.S. withdraws from the deal.”

U.S. TO PULL OUT OF IRAN NUCLEAR DEAL

U.S. President Donald Trump has decided to scrap an internationally brokered nuclear deal with Iran and reimpose sanctions

Uranium mines

Reactor

Uranium enrichment

Military

Fordow: Under deal, fuel enrichment halted for 15 years. Facility converted for medical isotope research only

1

Arak: Heavy water reactor redesigned to prevent production of weapons-grade plutonium

2

Centrifuges at Natanz and Fordow cut from 20,172 to 6,104. Uranium enrichment limited to 3.67%

3

0

400

Caspian Sea

KM

Ramsar

IRAN

Bonab

Tehran

1

3

Karaj

Parchin

2

Natanz

Isfahan

Saghand

IRAQ

Ardakan

IAEA* to monitor uranium mining for 25 years

Bushehr

Gachin

Persian

Gulf

SAUDI ARABIA

2013: Hassan Rouhani

(left) elected Iran’s

president, replacing

hard-line Mahmoud

Ahmadinejad

Nov. 2013: Iran agrees to

pact withU.S., Britain, China,

France,Germany and Russia

to curbnuclear work in return

for sanctions relief

Jan 2016: Iran nuclear deal – JCPOA** – enacted. Iran receives $100-billion of its assets frozen in foreign banks

2015: Congress passes Iran Nuclear Agreement Review Act – INARA – which allows U.S. President to reimpose sanctions

Sep 2017: IAEA says Iran

is in compliance with JCPOA.

U.S. and EU say missile tests

violate UN resolution 2231

which is part of deal

May 8, 2018:

Trump announces

U.S. pulling

out of Iran

nuclear deal

*International Atomic Energy Agency

**Joint Comprehensive Plan of Action

THE GLOBE AND MAIL, SOURCE: GRAPHIC NEWS

U.S. TO PULL OUT OF IRAN NUCLEAR DEAL

U.S. President Donald Trump has decided to scrap an internationally brokered nuclear deal with Iran and reimpose sanctions

Uranium mines

Reactor

Military

Uranium enrichment

Fordow: Under deal, fuel enrichment halted for 15 years. Facility converted for medical isotope research only

1

Arak: Heavy water reactor redesigned to prevent production of weapons-grade plutonium

2

Centrifuges at Natanz and Fordow cut from 20,172 to 6,104. Uranium enrichment limited to 3.67%

3

0

400

TURKEY

Caspian Sea

KM

Ramsar

IRAN

Bonab

Tehran

1

3

Karaj

Parchin

2

Natanz

Isfahan

IRAQ

Saghand

Ardakan

IAEA* to monitor uranium mining for 25 years

Bushehr

Gachin

Persian

Gulf

SAUDI ARABIA

2013: Hassan Rouhani

(left) elected Iran’s

president, replacing

hard-line Mahmoud

Ahmadinejad

Nov. 2013: Iran agrees to pact

with U.S., Britain, China, France,

Germany and Russia to curb

nuclear work in return for

sanctions relief

Jan 2016: Iran nuclear deal – JCPOA** – enacted. Iran receives $100-billion of its assets frozen in foreign banks

2015: Congress passes Iran Nuclear Agreement Review Act – INARA – which allows U.S. President to reimpose sanctions

Sept. 2017: IAEA says Iran

is in compliance with JCPOA.

U.S. and EU say missile tests

violate UN resolution 2231

which is part of deal

May 8, 2018:

Trump announces

U.S. pulling

out of Iran

nuclear deal

*International Atomic Energy Agency

**Joint Comprehensive Plan of Action

THE GLOBE AND MAIL, SOURCE: GRAPHIC NEWS

U.S. TO PULL OUT OF IRAN NUCLEAR DEAL

U.S. President Donald Trump has decided to scrap an internationally brokered nuclear deal with Iran and reimpose sanctions

Uranium mines

Uranium enrichment

Military

Reactor

TURKEY

Caspian Sea

Ramsar

Centrifuges at Natanz and Fordow cut from 20,172 to 6,104. Uranium enrichment limited to 3.67%

Fordow: Under deal, fuel enrichment halted for 15 years. Facility converted for medical isotope research only

Bonab

Tehran

Karaj

Parchin

IRAN

Natanz

IRAQ

Isfahan

Saghand

Arak: Heavy Water Reactor redesigned to prevent production of weapons-grade plutonium

Ardakan

IAEA* to monitor uranium mining for 25 years

Bushehr

Gachin

Persian

Gulf

0

400

SAUDI ARABIA

KM

2013: Hassan Rouhani

(left) elected Iran’s

president, replacing

hard-line Mahmoud

Ahmadinejad

Nov. 2013: Iran agrees to pact with

U.S., Britain, China, France,

Germany and Russia to curb

nuclear work in return for

sanctions relief

Jan 2016: Iran nuclear

deal – JCPOA** – enacted.

Iran receives $100-billion

of its assets frozen in

foreign banks

2015: Congress passes

Iran Nuclear Agreement

Review Act – INARA –

which allows U.S. President

to reimpose sanctions

Sept. 2017: IAEA says Iran

is in compliance with JCPOA.

U.S. and EU say missile tests

violate UN resolution 2231

which is part of deal

May 8, 2018:

Trump announces

U.S. pulling

out of Iran

nuclear deal

*International Atomic Energy Agency **Joint Comprehensive Plan of Action

THE GLOBE AND MAIL, SOURCE: GRAPHIC NEWS

Mr. Rouhani responded with a warning that “we can begin our industrial enrichment without any limitations,” though he suggested no immediate response.

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“Until implementation of this decision, we will wait for some weeks and will talk with our friends and allies and other signatories of the nuclear deal, who signed it and who will remain loyal to it. Everything depends on our national interests.”

There is a 180-day phase-in period.

There’s a big corporate hit, too, as licences for Boeing Co. and Airbus for sales to Iran, for example, are being revoked.

“While there is considerable debate over the effectiveness of unilateral U.S. action on Iran, we think that a revival of the threat to lock non-compliant corporates out of U.S. capital markets provides the White House with a pretty powerful stick,” said Ms. Croft, Mr. Louney and Mr. Tran.

“While Chinese compliance is probably a non-starter, we do anticipate a high degree of co-operation from European, Japanese and South Korean corporates despite their host governments’ opposition to the U.S. move,” they added.

Leave the gun, take the cannoli: Geopolitical risks continue in the spotlight

— Société Générale

RBC hasn’t yet changed its oil price forecast, still expecting Brent crude to average US$72 a barrel through the first half of this year, but it has warned of the threat of disruptions that could boost it.

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Société Générale is taking a similar approach, though, said strategists Michael Wittner and Mark Kogel, “on balance, the upside risks to our oil price forecasts are significantly greater than the downside risks.”

Mr. Wittner and Mr. Kogel expect, at this point, that Brent will average US$67, and WTI US$63, in the second quarter, and US$68 and US$64, respectively, in the third.

Also playing into that is Venezuela’s spiral, and the possibility of further U.S. sanctions there, too.

“Upside risks to our outlook come from geopolitical risks and related crude supply disruptions, particularly from Iran and Venezuela,” they said in a report titled “Leave the gun, take the cannoli: Geopolitical risks continue in the spotlight,” a play on one of the famous lines from The Godfather.

Read more

Markets mixed

Global markets are mixed so far, with oil’s gains buoying some stocks.

Japan’s Nikkei lost 0.4 per cent, and the Shanghai composite just shy of 0.1 per cent, with Hong Kong’s Hang Seng up 0.4 per cent.

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In Europe, London’s FTSE 100 was up 0.5 per cent by about 8:45 a.m. ET, though Germany’s DAX and the Paris CAC 40 were down slightly.

New York futures were up.

“The FTSE 100 is being helped by oil stocks in the wake of President Trump’s withdrawal from the Iran nuclear deal,” said CMC Markets analyst David Madden.

“BP and Royal Dutch Shell are among the biggest gainers this morning as they benefit from the underlying oil market,” he added.

“The U.S. has pledged to reintroduce sanctions on Iran, and, in turn, the possibility of reduced supply is pushing up the oil price.”

Currencies are also feeling the impact, with the U.S. dollar stronger and the Canadian dollar above 77.5 U.S. cents.

Read more

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