Oil steadies amid Korean peace pledge, threat of Iran sanctions

Futures in New York slipped 0.4%, on course for a 0.7% drop this week. North Korean leader Kim Jong Un and South Korean President Moon Jae-in agreed to finally end seven decades of hostilities this year. Earlier this week, French President Emmanuel Macron predicted President Donald Trump will exit the Iran agreement, while U.S. Defense Secretary Jim Mattis said Thursday a decision on a withdrawal hasn’t been made.

Oil this month touched the highest level in more than three years as speculation swirled over the potential breakup of the nuclear accord that Iran signed with world powers in 2015. The deal had lifted sanctions on the Islamic Republic, enabling it to boost oil production by about 1 MMbpd. Investors are also watching global inventories amid signs that production cuts by the Organization of Petroleum Exporting Countries and its allies could continue to deepen while American output soars.

“The oil price should not fall in any significant way until the question of renewed Iran sanctions has been resolved,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt.

West Texas Intermediate crude for June delivery traded at $67.87 on the New York Mercantile Exchange, down 32 cents, at 1:39 p.m. in London. Total volume traded was 22% below the 100-day average.

U.S.-Iran situation

Brent crude for June delivery dropped 13 cents, or 0.2%, to $74.61/bbl on the London-based ICE Futures Europe exchange. Prices are up 0.7% for the week. The global benchmark crude traded at a $6.72 premium to June WTI, near the widest premium this year.

Futures for September delivery rose 0.6% to 444.2 yuan per barrel on the Shanghai International Energy Exchange in afternoon trading on Friday. The contract is on course for a 1.7% gain this week.

There’s been no decision made on “any withdrawal” from the Iranian nuclear deal and discussions are still ongoing among U.S. government officials, Mattis said during a testimony on Capitol Hill on Thursday. That comes after French President Macron said in Washington that he believes the U.S. President will get rid of the deal unilaterally for “domestic reasons.”

The nervousness around a potential breakdown in the deal is also spilling over into the physical oil market. Traders are unwilling to sign contracts for Iranian crude and refined products that would be valid after May 12, the deadline for Trump to decide whether to reimpose sanctions, according to recent interviews with six companies that buy and sell cargoes in the Middle East.

Also in focus is the first summit between the leaders of the two Koreas in 11 years. The North Korean leader made history by walking across the border and called for more talks with his counterpart from the South. Investors are trying to determine whether the symbolism-laden meeting can eventually lead to a deal with the U.S., finally resolving the escalating nuclear tension on the peninsula.