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Iran and P5+1 agree, just not on a deal (Brent: $106.8)

Our base case scenario described in Tuesday's Market Briefing seems to have come true. The five permanent members of the UN Security Council and Germany have agreed with Iran…..to have a third meeting. Moscow will set the stage for the 18-19 June negotiations. The third meeting will be the last possible official meeting before the EU/US sanction kick into full gear.

The second talk in Baghdad ended in a deadlock. Western powers want Iran to halt nuclear enrichment before sanctions are lifted. Iran, on the other hand, wants sanctions to be lifted before nuclear enrichment is halted. We expect volatility to continue, but mainly sideways until the Moscow meeting has shown something concrete.

We strongly urge clients to pay close attention to the following dates in June

On Sunday 17 June the second Greek election will take place. Monday 18 and Tuesday 19 June will give hints on Iran nuclear talks. On Thursday 28 June the US financial sanctions on any financial institution dealing with Iran will kick in. Saturday 30 June is the last day before EU sanctions on Iranian oil kick in.

One thing seems certain; the summer will give a lot of volatility as the Greek and Iranian situation battle for headlines.

Recommendation

In the battle between oil bears; potential Euro break-up and thus lower demand, and oil bulls; Emerging markets offsetting lower demand from the Euro Zone, the bears have gained the upper hand. Where the exact bottom may be is hard to predict, but what we do know is that OECD crude inventories are currently very low. Saudi Arabia is pumping at record levels. World demand is increasing at almost 1 mbpd even as EU/US demand slows. We see the current levels as favorable for long term hedges. Looking into 2013, and considering the backwardation, the current achievable levels should prove favorable even if volatility continues throughout the summer.