By Nicholas Lua and Alex Longley

(Bloomberg) — Oil held near $71 as traders weighed the odds of a nuclear deal between the US and Iran ahead of talks on Thursday, with a huge deployment of American forces in the Middle East keeping the market on edge.

Brent (BZ=F) edged higher after closing 1% lower in the previous session. President Donald Trump claimed in his State of the Union address that Iran is working to reconstitute its nuclear program, adding to speculation he’s preparing for military action.

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“My preference is to solve this problem through diplomacy, but one thing is certain: I will never allow the world’s number one sponsor of terror, which they are by far, to have a nuclear weapon,” Trump said on Tuesday.

During his State of the Union address, President Donald Trump said Iran wants to rebuild “sinister” nuclear ambitions.Source: Bloomberg

Iran has consistently said its atomic program is for peaceful purposes and has denied that it’s seeking weapons. During his address to the US Congress, Trump reiterated previous comments that the regime’s nuclear program was “obliterated” in strikes last June that targeted three facilities.

The oil market has been sensitive to headlines tied to a potential conflict, with futures rallying at the start of the year, despite widespread expectations that swelling supplies would weigh on prices. Secretary of State Marco Rubio and the director of the Central Intelligence Agency briefed senior lawmakers about Iran on Tuesday as the military deployment fueled speculation of an attack.

The US has ordered the biggest military build-up in the Middle East since the second Gulf war in 2003, including two aircraft carriers. America is adding even more assets to the region, deploying 12 stealth F-22 fighter jets to Israel, according to CNN, which cited a defense official.

Should hostilities escalate, Tehran could retaliate by disrupting shipping through the Strait of Hormuz, which handles about a quarter of the world’s seaborne oil trade. Tankers carrying liquefied natural gas also transit through the narrow waterway separating Iran and the Arabian Peninsula.

“So long as we remain in this realm of uncertainty, oil prices are more prone to upside risk on any headlines out of the US-Iran talks,” said Samantha Hartke, head of market analysis for the Americas at Vortexa Ltd. “Our view is that a prolonged disruption is unlikely given the onerous effect that will have on Iranian trade flows and revenues,” she added, referring to Hormuz.

The next round of nuclear talks between the US and Iran are set for Thursday in Geneva. Trump’s special envoy Steve Witkoff and his son-in-law Jared Kushner are slated to meet again with Iranian Foreign Minister Abbas Araghchi.

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