The market has been pricing in a thaw in US-Iran relations for weeks, but yesterday’s announcement that a deal is ‘very close’ sent a ripple through the oil complex. Brent crude slid 2% on the news, as traders bet on a return of Iranian barrels to a market already grappling with demand uncertainty. But the real story, as ever, is the politics.
JD Vance, the US Senator and prominent foreign policy hawk, has fired a warning shot across the bow of any administration tempted to cut Europe out of the negotiation. ‘The US cannot make a deal that leaves our allies in the lurch,’ he said. ‘Europe must have a seat at the table, or this deal will lack the durability it needs.’
Vance’s comments highlight a fundamental tension that has dogged the JCPOA since its inception. The 2015 deal was a multilateral triumph, but the Trump administration’s unilateral withdrawal in 2018 showed how fragile that structure was. Now, as the Biden team inches back towards diplomacy, the question is whether the US can rebuild trust with both Tehran and Brussels.
For the markets, the stakes are clear. A return of Iranian oil would ease supply constraints and help cap inflation, but only if the deal is credible. If Europe is sidelined, the risk of another US-imposed snapback increases, leaving the oil market in a state of uncertainty that traders loathe. The 10-year gilt yield has already ticked up 3 basis points on the news, suggesting investors are wary of the inflationary implications of a rushed deal.
But there is a deeper fiscal dimension. European governments, already struggling with soaring energy costs and budget deficits, need the stability that a comprehensive deal would bring. A US-Iran agreement that ignores their interests would not only undermine the transatlantic alliance but also exacerbate the capital flight already underway from European markets to the US. The dollar has strengthened this morning, a clear sign that investors are betting on an American-led resolution.
Central banks, too, are watching closely. The Federal Reserve has signalled it is prepared to ease policy if inflation moderates, and cheaper oil would provide cover for rate cuts. The European Central Bank, however, is in a trickier position. With growth stagnating and inflation still above target, a deal that isolates Europe could force the ECB to tighten into a recession, a nightmare scenario for bond markets.
In my view, the Vance intervention is a reminder that markets cannot ignore geopolitics. The bottom line is that any deal that lacks European buy-in is a deal built on sand. Investors should be cautious about pricing in a swift resolution. The path to a final agreement is littered with obstacles, not least the domestic politics of Tehran and Washington. Until there is a signed document with multiple signatures, the market will remain more volatile than a tech stock in a bear market.
For now, the oil bears are having their moment, but the structural forces that kept prices elevated are not going away. The real question is whether this deal can deliver the kind of durable peace that markets crave. My bet is that we will see more headlines of progress followed by setbacks, and that the only certainty is uncertainty.
