Trump's Iran move and oil
The market should not ignore the geopolitical risks if the nuclear deal now unravels
How bullish is Donald Trump's plan to decertify the Iran nuclear deal?
It might pass without much impact. But no one in the oil market should discount the alternative scenario—that new US sanctions complicate Iranian oil exports, worsen the Middle East's geopolitics, and increase the risk of more regional conflict.
Although the procedure of decertification, by way of a statement to Congress, is straightforward, the politics is less so and the consequences of Trump's decision, like the president himself, are unpredictable.
Rolling certification every 90 days that Iran is complying with the terms of the Joint Comprehensive Plan of Action (JCPOA) was a condition Congress put on Barack Obama, angry that he had used executive orders and some legalese to argue that the JCPOA did not need the Hill's approval.
When, as expected, Trump tells Congress before 15 October that Iran is no longer complying with the JCPOA the matter may simply end there. New sanctions aren't inevitable. Congress would have 60 days to decide if it wanted to re-impose some measures. Trump could do so himself, either by executive order or by no longer waiving some sanctions already in place.
In the short term, the status quo looks likeliest. Ahead of the decertification, the White House had briefed American press that it would advise against new sanctions. With tax and healthcare reforms, Congress has a lot on its plate already too. The storm would be kept in the tea cup.
That's the least-damaging outcome of Trump's decertification—a decision that has baffled other parties to the deal, including the International Atomic Energy Agency, European signatories to the JCPOA, and even members of Trump's cabinet, who all say Iran is complying. James Mattis, Trump's own Secretary of Defense, says it is against US interests to pull out of the deal.
Nonetheless, for several reasons the oil market shouldn't be sanguine.
First, new US sanctions may not arrive immediately, but the decertification is a finger in Iran's eye. If it is part of a new more aggressive stance on Iran, another embargo can't be discounted—how otherwise does Trump make further political capital from taking on Tehran? If the first 10 months of his presidency have shown anything, it's that the US president isn't afraid to take on received opinion or act on his impulses, however radical —or to change his mind. "It doesn't make a lot of sense to keep the waivers going", after Trump decertifies the deal, said Richard Nephew, an expert on sanctions at Columbia's Center for Global Energy Policy, in a recent podcast.
New US sanctions probably wouldn't have the dramatic impact on Iranian exports of the earlier ones, which cut about 1m barrels a day from supply between 2012 and 2015. Given the international backing for the deal, the US would struggle to persuade most Asian and European buyers to stop importing Iranian crude immediately. Importers with business in the US might think twice, though. And US sanctions would affect shipping insurers or banks that supply importers with credit. In short, the US could throw much sand in the Iranian oil-export machine. Quantifying that impact is hard, but Nephew reckons that it could crimp exports by 300,000-400,000 b/d.
Still, oil is fungible, so unless all countries agreed to stop buying Iranian oil it would find its way into the market, neutralising some of the price impact. Iranian crude that couldn't find a home would end up in storage. Some would also flow into the black market or be shipped through Iraq.
The second reason is more long-term—and other potential outcomes of decertification are more serious. Iran's upstream opening would face even stronger headwinds than the ones that have stalled it so far. Total is the only major Western company to have signed a deal in Iran's upstream since the JCPOA deal brought an end to some sanctions. Many others have resisted, partly for local Iranian reasons but also because residual US sanctions (which were never lifted) raised legal risks. Iran's plans depend on developing big projects, for which it needs project financing—inevitably involving banks with US exposure—and foreign expertise. Consider the opening indefinitely stalled if a new US embargo is erected.
More serious again is the geopolitical fallout from decertification. "The JCPOA's primary advantage has always been the absence of a compelling, viable alternative," wrote Suzanne Maloney, a senior fellow at the Brookings Institute, recently. Decertifying it may start a process leading to more conflict in the Middle East. The "worst scenario", Nephew reckons, is that the deal unravels without the cooperation of other countries and therefore without significant measures to replace it. If Iran does want to develop a nuclear missile, its check on doing so would be gone. This, believes John Brennan, the former head of the CIA, would prompt an arms race in the Middle East, kicking off the kind of doomsday-machine scenario—involving Israel striking at Iran to prevent its weapons programme—that led to the JCPOA in the first place.
Cornering Iran in this way, after a few years in which it had been promised reintegration into the global economy and had been observing its JCPOA commitments, inevitably risks a reaction from Tehran. The head of the country's Revolutionary Guards has said, for example, that his group will begin targeting US troops in Iraq and Syria. You don't need a PhD in International Relations to see how that turns out.
Anyone selling oil can't ignore these alarm bells. Former Trump advisor and agitator Steve Bannon's view, that a "major shooting war" in the Middle East is on the cards, suddenly looks all too plausible. All the tight oil in Texas wouldn't be enough to halt that price rally.