Oil prices snap back in volatile trade ahead of Trump speech on Iran nuclear deal

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Oil prices turned volatile on Tuesday as news reports telegraphed President Donald Trump‘s intention to restore sanctions on Iran, a move that effectively withdraws the United States from the 2015 Iran nuclear deal.

Crude futures plunged about $3 a barrel after Bloomberg News initially reported that Trump will announce new sanctions on Iran, but would not leave the deal, citing CNN. However, that headline was not accurate.

CNN actually reported that Trump would restore sanctions that the U.S. suspended starting in 2016, marking the first step toward exiting the nuclear deal. The New York Times then reported that Trump told French President Emmanuel Macron he will indeed withdraw the United States from the accord.

Trump is scheduled to make his official announcement on Tuesday at 2 p.m. ET.

U.S. West Texas Intermediate crude oil was down $1.65 a barrel, or 2.3 percent at $69.08 by 11:53 a.m. ET (1553 GMT). The contract rose as high as $70.84 on Monday and ended the session about $70 a barrel for the first time since November 2014.

International benchmark Brent crude fell $1.30, or 1.7 percent, to $74.87. Brent touched $76.34 on Monday, its best level since Nov. 27, 2014.

Iran is OPEC’s third-largest oil producer and currently exports about 2.5 million barrels a day. Renewed sanctions would likely crimp those shipments at a time when global oil supply and demand have essentially balanced out. That increases the risk that the market could swing into undersupply and send oil prices higher.

However, prices backed off Monday’s highs after Trump tweeted that he would announce his decision four days before a deadline spelled out in the nuclear deal.

The tweet convinced some investors that the worst of the market’s fears — that Trump will move quickly to impose sever sanctions — won’t be realized, according to John Kilduff, founding partner at energy hedge fund Again Capital. Instead, some traders are now anticipating a “Trumpian half measure,” he said.

“I think they’ll pull out of the deal, but I don’t think he’ll go much further than that,” Kilduff said. “We’re pulling out of the deal, but he’s going to hold off on reimposing sanctions until he can have an opportunity to work out some other sort of arrangements with Iran and the allies themselves.”

The CNN report on Tuesday appeared to at least in part confirm that expectation. Sources told the network it could take months for the sanctions to take effect as the administration develops guidelines for companies and banks.

Trump warned earlier this year that he would pull out of the nuclear accord unless he could reach a deal with Britain, France and Germany to toughen the terms of the agreement. That deal has not emerged.

If Trump restores sanctions, the impact on oil flows will depend in part on how Washington chooses to implement them.

However, analysts say that lack of international support for renewed U.S. sanctions means the measures will likely only remove 300,000-500,000 barrels a day of Iranian crude from the market. That compares with 1 million-1.5 million barrels a day under President Barack Obama.

The oil market is vulnerable to a sell-off because investors have taken out a record number of long positions in crude futures in recent months. Investors could unwind these long positions, or bets that oil prices will keep rising, if Trump’s announcement on Tuesday eases geopolitical concerns.

“A de-escalation of the geopolitical tension is likely to trigger an outflow from investors, reducing significantly whatever risk premium is embedded in prompt prices, given that investors are holding near-record net long positions,” Edward Morse, global head of commodities research at Citi said in a recent research note.

The continued deterioration of Venezuela’s economy, underpinned by a drop in its lifeblood crude oil production, has helped to underpin prices.

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