President Donald Trump said his administration was “putting Iran on notice,” following its test of a ballistic missile. The US Treasury Department placed sanctions on 13 individuals and 12 entities which cannot do business with US companies are access the US financial system. They are also subject to secondary sanctions, which means foreign companies and individuals are likewise prohibited from doing business with them, lest they be blacklisted by the US. Thus Iran and the US are once again on a path toward conflict, a little over a year since EU and US sanctions on the country were removed, allowing Iran to return to the global oil market. And more US punitive action could be forthcoming, as a senior administration official said late last week that these sanctions are “an initial step” in response to Iran’s “provocative” behavior.

Iran’s political volatility has metaphorically matched the volatility in oil prices. Upon its return to the oil market in early 2016, the country pledged to boost oil production to 4 M/bpd. Since that time, the country has been trying to attract foreign investors to help it rebuild its aged oil and gas infrastructure, and a new contract model was approved last year toward this end.

Last spring, Iranian oil minister Bijan Zanganeh was asked whether Iran would participate in an oil production freeze deal in order to support oil prices. “Dumb” and “ridiculous” were among the words employed in his response. Iran indeed joined other oil producers in Doha, Algeria, last April to discuss freezing production at January 2016 levels. When Iran refused to participate, Saudi Arabia backed out of a deal. At the time, this was just the latest in a series of oil market-related and politically-related conflicts between the Middle East region’s arch-enemies. The two countries are still fighting a proxy war in Yemen, are often on different sides in the ongoing Syrian conflict, and remain as theologically opposed to each other as they ever have been since the Middle Ages.

The nuclear deal reached between the P5+1 and Iran in 2015, and implemented in early 2016, initially thawed the tense relations between Iran and the West. So far, US companies have expressed reticence to reenter Iran’s oil and gas sector. It’s the European firms- principally Total and Eni, as well as Vitol Group, the world’s biggest oil trader, that have expressed the most concrete interest. Eni’s chemicals subsidiary Versalis became the first European company to ink a contract with Iran in August 2015, according to an official report issued by National Iranian Petrochemical Company (NIPC) cited by mehrnews. Vitol Group signed a deal with the National Iranian Oil Company in January to loan it an equivalent of $1 billion euros secured by future refinery products exports, according to a Reuters report. That pre-finance agreement was the first such contract inked between Iran and a trading house since sanctions were lifted.

With the US and Iran once again expressing mutual antipathy, analysts have begun exploring what this could mean for oil prices this year. Timothy Evans, energy analyst at Citi Futures, told Reuters, “While the market is taking these actions in stride so far as unlikely to result in a larger military conflict that would put Persian Gulf crude oil supplies at risk, the odds of that scenario are certainly higher than a week ago.”

According to a UPI report, Iran said souring relations with the US will not prevent the country from getting its oil to the global market, nor halt the growth of its oil production. Alaeddin Boroujerdi, chairman of Iran’s Foreign Policy and National Security Commission, said “Despite enemies’ economic war against Iran, we were able to increase oil export from 1 million barrels per day to 2.4 million bpd by raising exploitation of oil fields,” the official Islamic Republic News Agency quoted him as saying.

During 2H16, the Iranian government reached preliminary arrangements with several foreign oil and gas companies. Earlier this year, Zanganeh’s oil ministry released a list of 29 foreign oil and gas firms that are qualified to participate in any upcoming exploration and production tenders.

Though most of these companies are based in Asia, the National Iranian Oil Company said the list is a “big step” in opening the Iranian oil and gas sector up to Western investors. Boroujerdi also said the Trump administration is responsible for widening the diplomatic gaps with some of the US’s strongest allies while he also boasted of Iran’s increasing ties with European powers.

According to a recent OPEC report, Iran exports over 500,000 bpd of refined products, mainly petroleum gas, fuel oil and naphta, to Asian markets. The country is currently OPEC’s third-largest oil producer, as it seeks to reclaim the second-largest spot that it held prior to the imposition of sanctions in 2013.

The trajectory of US-Iranian relations will undoubtedly influence not only the global political chessboard, but the global oil market as well. Iran could very well turn into the “black swan” of 2017’s oil market story.

About The Author Jeff Reed

I specialize in analysis of the oil and gas sector- with emphasis on the Middle East, OPEC, and the politics of energy. I hold a BA in Political Science and MA in Theological Studies from the University of St. Thomas. Prior to a career in oil and gas journalism, I was a Roman Catholic priest serving churches in the Houston area. I also taught high school for a year in Oakland, California, and worked for two years in retail management. Among my other areas of interest are political philosophy, religion and society, culture and the arts, and philosophy.