Trump pulls out of Iran nuclear deal: Which stocks could benefit from a crude surge?

Following US President Donald Trump’s decision to pull out of the Iran nuclear deal, oil prices on Wednesday surged. Investors are betting on paucity of the commodity arising out of the sanctions that are likely to be imposed by the US.

President Donald Trump announced Tuesday that the US will pull out of the landmark nuclear accord with Iran, dealing a profound blow to US allies and potentially deepening the President's isolation on the world stage.

"The United States does not make empty threats," he said in a televised address. Trump's decision means Iran must now decide whether to follow the US and withdraw or try to salvage what's left of the deal. Iran has offered conflicting statements about what it may do — and the answer may depend on exactly how Trump exits the agreement.

Trump said he would move to re-impose all sanctions on Iran that had been lifted under the 2015 deal, not just the ones facing an immediate deadline. This had become known informally as the 'nuclear option' because of the near-certainty that such a move would scuttle the deal.

Kotak Securities believes the decision could ‘exacerbate the global crude supply-demand deficit’ and keep prices elevated in the near-term.

“In our view, it is the right time for the Organisation of the Petroleum Exporting Countries (OPEC)/non-OPEC cartel to consider raising crude supplies to accommodate the shortfall in global crude availability amid declining inventories,” the brokerage said in a report.

The decision needs to be taken, it said, to mitigate: (1) the ongoing crude supply-demand deficit due to declining production from Venezuela/Mexico and (2) a further increase in deficit from potential re-imposition of sanctions on Iran.

It highlighted that the cartel has already achieved its objective of reducing crude inventories below its five-year average in terms of forward demand cover and even absolute volumes are expected to fall below its five-year average in coming months.

“If the cartel continues its production trajectory, Organisation for Economic Co-operation and Development (OECD) inventories may fall sharply during the current year, compounding constraints of global crude availability,” it added.

This is likely to moderate crude prices in the medium-term. The brokerage likes GAIL India and Oil and Natural Gas Corporation (ONGC) over oil marketing companies (OMCs) on the back of higher crude.

While near-term prices could be elevated, an ‘indifference’ on OPEC’s part could incentivise growth in the US shale oil production (and Canadian oil sands), which may jeopardise the cartel’s significance in the medium- to long-term.

“The recent rally in global crude prices has led to an increase in drilling activities and consequent increase in oil production from US shale basins. We do see near-term bottlenecks in the US and Canada, which may restrain incremental supplies over the next 12 months, as both midstream pipelines are operating near full capacity utilisation,” it said.