I think he was indirectly responding to Netanyahu's push to require Iran to recognize the state of Israel as part of the nuclear deal. I think the President was saying that there was no way the current government of Iran would do that, so making that demand would be effectively just killing the whole deal.

I don't think Netanyahu is actually so detached from reality as to think that Iran is going to magically transform into Sweden, unless he's had some sort of massive psychotic break that has otherwise gone completely unnoticed.