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Tillerson ouster shakes up energy diplomacy

American policy towards Iran and Venezuela will likely grow harsher, injecting more risk into energy markets

Rex Tillerson is out as US secretary of state after being unceremoniously sacked by his boss via Twitter this week.

Oil spiked briefly on the news, but quickly reversed on short-term worries over surging US supply and ended the day down. But Tillerson's ouster is likely to be bullish for oil in the months ahead.

The former ExxonMobil CEO was both pilloried for his performance leading the State Department, but also seen at home and in foreign capitals as a moderating influence within the Trump administration.

His apparent successor Mike Pompeo, who has been heading up the CIA, will bring a harder version of Trump's "America First" philosophy to the diplomatic scene.

On Iran, Tillerson had publically vouched for Tehran's compliance with the nuclear deal and was keen to keep the agreement in place, much to Trump's frustration. Tillerson argued that careful diplomacy with European allies and others could ratchet up pressure on Iran's missile programme and other issues without scuppering the nuclear agreement. But Trump appears to want something more dramatic.

Trump pointed to this very public riff with his secretary of state on a key policy issue as a primary reason he let Tillerson go. "When you look at the Iran deal, I think it's terrible. I guess he thinks it was OK. I wanted to break it or do something, and he felt a little bit differently," said Trump.

Emboldened and enabled

Pompeo, an Iran hawk, is more in line with Trump on the deal. "I look forward to rolling back this disastrous deal with the world's largest state-sponsor of terrorism," Pompeo said in a since-deleted tweet shortly after he was appointed CIA chief in November 2016.

Trump signed off on another six months of sanctions waivers in January, and traders may be betting that he'll do so again despite all the president's bluster on Tehran. But a little more than a year into his term, Trump is clearly feeling emboldened to follow his nationalist instincts in foreign policy, as he has done with the tariffs, and is putting a team in place that will enable rather than try to hem him in. 

The next review of Iran's sanctions waiver could mark the beginning of the end of the deal

If so, Iranian barrels could start disappearing from the market over the summer, which is clearly bullish for oil. Prior to the sanctions, exports were around 1m barrels a day lower than they are now.

However, Trump's go it alone approach on Iran means any sanctions regime will likely be leakier than the Obama-era restrictions, which had broad support from Europe, China, Russia and others.

Europe, whose refiners have been feasting on new Iranian light oil supply and whose companies are keen on investing in the country, has resisted Trump's efforts to unilaterally change the deal and isn't likely to go along with new sanctions while Tehran is still seen as holding up its end of the bargain. They are even more unlikely to yield to Trump while being squeezed on new steel and aluminium tariffs. China, India and others are likely to take a similar line.

Still, US financial sanctions are a powerful tool and many banks, insurers and traders will be scared off Iranian crude. Fact Global Energy, a consultancy, argues imports could drop by anywhere between 250,000 to 500,000 barrels a day by the end of the year. Surging US supply would undoubtedly blunt some of the effect of the loss, and light oil exports from the US could plug some of the gap for consumers of Iranian crude.

Recipe for blowback

Another area where Tillerson's exit might be felt is in Venezuela. Tillerson's State Department played a supporting role along with the Treasury Department and White House on Venezuela sanctions, so it's unlikely Tillerson's exit will fundamentally change the course of the administration's strategy.

But Tillerson, an oilman, was keenly aware of the blowback such sanctions would inflict on US refiners and allies in the Caribbean. He urged a cautious approach on direct oil sanctions—either banning oil exports or the sale of light crude and products to state-run PdV.

Pompeo last August framed the Venezuela situation in stark security terms. "The Cubans are there; the Russians are there, the Iranians, Hezbollah are there," he told Fox News last year. "This is something that has a risk of getting to a very, very bad place, so America needs to take this very seriously." If the Venezuelan crisis continues to deteriorate, Pompeo would seem more likely to back hardliners in the administration advocating a crackdown on Venezuela's oil industry.

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