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Here's an excerpt from an institutional research note written by Hedgeye Potomac Senior Energy Policy analyst Joe McMonigle. If you're an institutional investor email sales@hedgeye.com to read this entire research note.

OIL ALERT: Surprise in Close Iranian Election Friday Raises Risk to Iran Nuclear Deal & Oil Exports - iranian flag

Hardliner Candidate Raisi Threatens President Rouhani’s Reelection & Iran Nuclear Deal

Iran’s Presidential election on Friday was supposed to be an easy reelection for President Hassan Rouhani, a moderate who was the architect of Iran’s nuclear deal with the west. But conservative hardliner Ebrahim Raisi has made it a much closer election as other hardliner candidates dropped out and consolidated around him.

For oil markets, a Raisi win would pose high risk to the Iran nuclear deal that lifted sanctions and added about 1 million barrels a day (b/d) of Iranian crude exports to global markets. Hardliners in Iran were opposed to the deal and have continued to challenge it as well as the new Iran Petroleum Contract designed to attract foreign energy companies and investments in the sector.

On paper, all of the Iranian presidential candidates have said they support the Iran deal but there is little doubt that Raisi and his hardline supporters would seek to undermine it.

Until now, much of the focus was on President Trump’s opposition to the Iran deal and potential future action by the Administration. But a Raisi win would shift that focus to Iran’s potential disruption of the deal. Moreover, Iranian trouble-making in the region under a hardliner regime could escalate further and present a catalyst for a Trump rejection of the deal.

If the US were to walk away from the deal and reimpose nuclear sanctions, Iranian crude exports of nearly 1 million b/d would likely be removed from the market and thus spike oil prices. While EU governments may not go along with a unilateral US action to reimpose sanctions, European energy companies would not have a choice and would not risk violating US sanctions. Most of the new Iranian crude exports have been sold to Europe but the US would lean hard on South Korea and Japan to also honor the sanctions.

However, if Iran itself prompts the end of the deal, then even EU governments would find it difficult to oppose new sanctions.

Recent polls show a very close election and indicate that Rouhani may still win on Friday but fall short of the 50 percent needed to avoid a run-off which sets up another one-on-one showdown with Raisi.