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Brent prices have fallen in the past three months as market concerns about geopolitical risk around Iran have been easing.This has largely been because Iran has returned to the P5+1 (the five permanent members of the UN Security Council and Germany) negotiating table to engage in talks with the international community.
And because Israeli prime minister Binyamin Netanyahu has brought in the main opposition Kadima party into a grand coalition and is less likely to strike Iran.
But Nomura’s senior political analyst Alastair Newton says that these risks could return and impact oil prices since the talks are starting to stutter and Israel could still choose to act.
The P5+1 talks are making little headway
While it would be difficult for Israel to launch a military strike on Iran as long as the talks are ongoing, the talks themselves seem to be making little actual progress.
P5+1 negotiators are hoping that tightening sanctions will cause Iran to blink. And the loss of two-fifths of its former 2.5 million barrels per day (1 mbpd) thanks to the EU and U.S. sanctions are hurting the country and could give the country reason to be more flexible.
“However, it is questionable whether the economic pain being inflicted on Iran will bring rapid results,” according to Newton. “Especially as long as the international community is demanding the total suspension of uranium enrichment – anathema to Tehran to date at least – as a precondition for easing sanctions (largely, we believe, at the insistence of the US where election-related domestic political considerations weigh heavily).
For now Newton thinks a breakdown in talks is more likely than some sort of breakthrough. But the international community is likely to keep the talks going if only to deter Israeli military action. The talks are set to begin again in Istanbul on July 3.
Israel could still choose to act
The decision to strike on Iran now would be very tough for Netanyahu because of the uncertainty of the outcomes. Moreover, he faces “increasingly openly voiced reservations” from members of Israel’s defence and security establishment.
Netanyahu also stands to take most of the blame if the attack went wrong which would definitely act as a blow at the ballot box. And he is also likely to be wary of the outcome of the U.S. presidential election. “The prospect of a second Obama term could encourage Mr Netanyahu towards a pre-election strike,” according to Newton. “Whereas a likely Romney victory could cause him to stay his hand.”
But the cross-party consensus that is inherent in the sort of grand coalition Netanyahu has would offer him more cover if he were to choose to strike.
While Newton thinks markets are right for now as far as geopolitical risk is concerned, he thinks a reversal in the recent trend of perceived and actual geopolitical risk can occur at any time, especially if the P5+1 talks were to stall completely leading up to the U.S. presidential elections in November.