Donald D-Day in the oil market

As always it is very difficult to know what Donald Trump is going to do: Reinstate sanctions or not? And today at 2 pm Washington time (5 pm CET) we will know. European diplomats (UK, France, Germany) who have discussed the Iran issues with US negotiators this spring seems to be convinced that Donald will exit the deal today and thus revive the US Iran sanctions from 2012. Trump reiterated on Monday his view that it is a “very badly negotiated deal” sowing little optimism for staying with the deal.

In February 2018 when Donald threatened to exit the deal last time there seemed to be very little understanding among the European allies what Trump really wanted to change in the Iran deal. Versus that there now seems to be quite some progress. Now it seems that there is a general agreement and understanding that the current deal is far from good enough and that it needs to be improved. We’ll see later today whether this is good enough for him to waive the sanctions yet again, kick the can down the road for another 180 days, lowering the gasoline pump prices and pleasing his consumers and mid-term election voters. If sanctions are revived then the impact is likely going to be limited for the 2018 oil market balance. Towards the end of 2019 however Iran’s crude oil exports could be reduced towards 1.3 m bl/d versus an average of 2.1 m bl/d in 2017. Reduced investments would hamper future Iranian production growth.

It seems clear that Donald Trump’s push towards the nuclear deal has opened the eyes of the European allies with the acceptance that the deal needs to be amended and improved. The key points which need to be amended, improved, added or addressed are:

1. Iran’s missile program
2. Iran’s meddling with other nations in the region like the current proxy war with Saudi Arabia in Yemen. In general curbing any Iranian effort for Iranian based Shia Muslim dominance in the Middle East
3. Sunset clauses in the current Iran nuclear deal which currently allows Iran to resume uranium enrichment after 2025 with possible revival of its nuclear program
4. Financing of terrorism

Iran however has stated that the current nuclear deal struck 14 July 2015 the Joint Comprehensive Plan of Action (JCPOA) is non-negotiable. That stand could be a red flag for Donald Trump making him push harder.

One can speculate whether the US mid-term elections might play a part in his decision today. What will be most important for the US voters: 1) Nixing the Iran nuclear deal + high gasoline prices or 2) A strong Donald Trump pushing the parties to the negotiation table + lower gasoline prices? It is clear that higher oil prices and retail US gasoline prices are eroding some of the positives from Donald’s tax cuts thus creating an economic headwind for the US consumers. Whether such considerations are part of his deliberations over the Iran nuclear deal decision today at 2 pm Washington time remains to be seen. He has at least already accused OPEC of manipulating the oil market to higher prices thus showing some sensitivity to the issue of higher oil and gasoline prices.

If Trump today reactivates the 2012 National Defence Authorization Act (NDAA) then importers of Iranian crude oil will need to seek exemptions to import crude oil or face US sanctions towards their state owned financial institutions or central banks. The once seeking exemptions in order to import crude oil from Iran will typically need to reduce imports by 20% every 180 days. China, Japan, South Korea and Japan would be the most important parties in terms of magnitude. Though China does not agree to new sanctions towards China it may still comply with the NDAA if it is revived in order to avoid secondary sanctions towards Chinese financial institutions from the US.

If all current importers of Iranian crude oil decide to ask for exemptions and thus continue to import Iranian crude they would still need to reduce imports by 20% every 180 days. Over the past 6 months Iran exported 2.1 m bl/d. A rolling 180 days 20% reduction would reduce Iranian exports to 1.3 m bl/d at the end of 2019 and close to 1 m bl/d in early 2020. It would have limited impact on the 2018 balance as it takes time to revive the sanctions. It would hamper investments in Iranian oil resources thus leading to a potentially tighter future oil market. This is probably why we have seen oil prices for longer dated contracts rise just as much as the front end of the crude oil curve lately.

The US sanctions towards Iran are multi-layered. The Iran Sanctions Act (ISA) from 1996, the Iran Threat Reduction and Syria Human Act (TRA) and the Iran Freedom and Counter proliferations Act (IFCA) from 2012 are up for their 180 days waiver renewal in July.

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking