Oil prices are indicating a worst-case scenario on Iran nuclear deal, economist says

  • U.S. President Donald Trump has referred to the 2015 Iran nuclear agreement as the "worst deal ever" and has to decide by May 12 whether to slap sanctions back on the country.
  • Oil prices have climbed in anticipation of that decision, which showed that investors are expecting the worst.

As the world awaits U.S. President Donald Trump's verdict on the 2015 Iran nuclear deal, climbing oil prices show that investors are expecting the worst.

Energy markets are indicating that the U.S. is likely to pull out of the accord and reimpose sanctions on Tehran, according to Dubai's largest bank, Emirates NBD.

The deal, officially called the Joint Comprehensive Plan of Action, lifted international sanctions against Iran in exchange for it curbing its nuclear program. Trump has referred to the agreement as the "worst deal ever," and he must decide by May 12 whether to reimpose sanctions or to grant the country a waiver.

"Anything that's slightly less than that — by which I mean he may delay his decision, or he may not impose the same amount of sanctions previously — I think markets would react favorably to that, given that markets are currently pricing in probably the worst-case scenario," Tim Fox, head of research and chief economist at Emirates NBD, told CNBC's "Capital Connection."

U.S. sanctions on Iran could slash global oil supplies by 800,000 barrels per day, according to a report by Emirates NBD. Iran is one of the world's biggest crude producers — when it's allowed to sell it.

Fears of such a supply cut, coming at a time when major oil countries have already reduced production on their own, have caused oil prices to climb above $70 per barrel for the first time since November 2014.

More than oil supplies at stake

But renewed U.S. sanctions on Iran may have a wider implication than oil supply and oil prices, given Tehran's growing influence in the Middle East and its role in regional crises such as Syria and Yemen, noted Fox. Iranian President Hassan Rouhani also warned that the U.S. would regret its decision to exit the deal.

"I think the region clearly will be concerned by that development in terms of anxiety about reactions — about how Iran would respond to that decision" by the United States, Fox said, adding that Iran's involvement in certain parts of the Middle East would increase political risks in the region.

"The political risks certainly remain significant for countries like Lebanon and Syria and neighboring countries of those as well," he added.

Iran and armed groups that it funds are active combatants in Iraq and Syria. One of those groups allied with Iran, Hezbollah, is seen picking up legislative seats in Lebanese elections that took place Sunday.

— CNBC's Cheang Ming contributed to this report.