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Advisors, Private Equity

Iran and Oil: The Impact of the 2016 Presidential Election

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It’s no secret that there has been mounting concern on a global scale around the current state of the oil market. Subject matter experts and investment professionals all have their own take on when the market will turn around. In addition to economic pressures, political pressures are bound to impact this timeline.

One of the most prominent political shifts of the past year that will continue to have a profound impact on the oil market is the enactment of the Iran nuclear deal. On January 16, 2016, the Iran nuclear deal was officially implemented after the Director General of the International Atomic Energy Agency (IAEA) confirmed that Iran had met all provisions stipulated in the deal’s outline.

With Iran’s assets now unfrozen and global sanctions lifted, Iran has returned to the global market and will have no hesitation supplying additional oil. According to Reuters, “Tehran says it could boost exports by 500,000 barrels per day within weeks.”

We face an incredibly glutted oil market, which will only be exacerbated by the terms of the Iran nuclear deal. While the deal is one of the crowning achievements of President Obama’s tenure in office, this deal faced and continues to face much opposition at home. Now that we are in an election year, it is important to look to the future and gauge each candidate’s intent for the Iran nuclear deal and the likely impact on the oil market should they win.

The Candidates’ Views

The two Democratic presidential candidates have surprisingly differing opinions on the deal. Hillary Clinton has traditionally stood by President Obama’s foreign policy, having served as his Secretary of State. However, her unwavering support has begun to weaken as she works to appeal to a much broader base of voters. While Clinton supports the deal, she has said there is a need for continued sanctions to hold the nation accountable for its ballistic missile program. Conversely, Bernie Sanders has long supported the Iran nuclear deal in its current form. He is a firm believer that the deal is a definitive step towards normalizing relations with Iran, and intends to enforce the pre-defined terms if elected president.

We see a much more unified opinion on the deal from the Republican pool of candidates, though there are small differences. Ted Cruz, Marco Rubio, Ben Carson, and Donald Drumpf have all publically expressed their aversion to the deal. These candidates share the view that the concessions made by the Iranian government were in no way great enough to warrant the lifting of sanctions. Even John Kasich, who has signaled a willingness to work within the current framework of the deal, intends to police the deal in a very stringent manner — one that could very easily lead to the United States and its allies re-imposing sanctions.

Looking to the Future

There is a strong likelihood that whomever wins the 2016 election will be in favor of more stringent terms or a complete dissolution of the deal. This outcome will prove instrumental in boosting the global oil market. While Russia and Saudi Arabia have proposed to strike a deal to freeze their oil exports at the January 2016 levels, assuming all other OPEC countries agreed to do the same, oil prices continue to fall. With many of the OPEC countries verbally committed to join the Saudi Arabia-Russia pact, Iran isn’t giving in. The country is eager to recover its oil market share lost during its period of crippling sanctions and is using the current crisis to its advantage. BBC recently reported that Iran had increased its crude oil production by 400,000 barrels a day.

If oil prices continue to fall at this alarming rate and efforts made by OPEC countries either dwindle or fail to address the supply issues and subsequent concerns of investors around the world, Iranian sanctions may prove a useful tool in reducing the concerns over falling oil prices.

The factors discussed in this article are largely uncontrollable and unpredictable at the moment. What we know for sure is that the vast majority of presidential candidates would, at a minimum, strengthen the terms of the Iran nuclear deal and revisit sanctions. Secondly, we know that these sanctions can have a profound impact on our domestic oil markets through a tangible reduction in supply and raise of prices and an intangible pacification of investor concerns. As for how and when these results may come to fruition, we must look to November 2016.

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