On the surface, the fact that they are talking may be limiting the upside. However, the risk premium remains intact because failed talks could increase the chances of a military conflict between the two countries.
“We keep going back and forth on this Iran situation,” said John Kilduff, partner at Again Capital. “It’s better one day or even one hour then worse the next. It’s status quo nervousness over Iran.”
The Iran Talks: What’s Actually Happening
According to Reuters, Iran’s chief diplomat on Friday said that the nuclear talks with the U.S. under the watchful eye of Omani mediators, were off to a “good start” and set to continue.
This represents the good news capping gains because it reduces the immediate risk of a U.S. military strike on Iranian nuclear facilities, Iranian retaliation and a region conflict that disrupts Middle East oil supply.
Why the Market Isn’t Buying the Good News
Friday’s meeting results were enough to stall the rally and curtail the need for more risk premium, but not enough to eliminate it completely. Friday’s rally indicates the market isn’t quite fully buying the “good news” bit yet. This is because traders know that talks can collapse quickly. One bad headline puts the situation back to elevated conflict risk.
Traders also know that if the situation is resolved quickly, crude oil will be vulnerable to the downside. Perhaps $5 to $15 could be tied to the risk premium. Sanctions on Iranian oil could be reduced, putting 1-2 million barrels/day back on the market. And it reduces concerns that the Strait of Hormuz could be blocked. This waterway is responsible for 20% of global oil flows.
