12-01-2018

Oil market waits for Trump decision on Iran sanctions waiver

US President Donald Trump is again keeping oil markets guessing about his Iran policy on the eve of a key deadline, but many Washington policy experts do not expect him to reimpose sanctions and abandon the nuclear deal just yet.

The Trump administration must decide by Friday whether to continue waiving oil-related sanctions that were lifted by the Iran nuclear deal known as the Joint Comprehensive Plan of Action. A number of other deadlines follow next week.

Iran has doubled its oil exports to about 2.2 million-2.3 million b/d since the Iran nuclear deal was implemented in January 2016.

US senators have been urging the White House to give Congress more time to craft a legislative fix to concerns about the deal, even though lawmakers have made little progress since Trump punted the issue to them in October.

Several sanctions experts predicted this week that Trump will likely do the same thing he did in October: declare that Iran is not in compliance with the deal — a requirement from Congress, not from the JCPOA itself — while at the same time extending the sanctions waivers and telling Congress to find a way to improve the deal’s perceived flaws.

Yet keeping the US in the JCPOA goes against one of Trump’s major campaign promises and contradicts his repeated characterization of it as one of the worst deals in history. That tension could spur some action in Congress, sources said.

“The more this comes up, you’d think the president would become less and less willing to make the same decision over and over again,” said John Hughes, former head of the State Department’s Iran sanctions team during the Obama administration. “That’s why I think they’re looking at creative ways to get this off the table.”

Hughes said Congress may find a way before the next waiver deadline in April to pass a bill that takes away the requirement for the president to certify the deal every 90 days, in addition to other measures that could be seen as increasing pressure on Iran.

Senator Bob Corker, Republican-Tennessee, an author of legislation to oversee the Iran deal, met with Trump this week and discussed Iran with National Security Advisor HR McMaster last week at the White House, along with Senator Ben Cardin, Democrat-Maryland.

“Senator Corker remains engaged in productive discussions with the White House and a number of his colleagues in the Senate about the appropriate path forward, and our allies continue to be updated on relevant developments,” spokeswoman Micah Johnson said.

‘HOLDING PATTERN’

The Rapidan Energy Group sees the Trump administration in a “holding pattern” on the nuclear deal: it will maintain pressure on Iran, mainly through non-oil sanctions, and will try to strengthen the agreement, not abandon it.

The consultancy said in a recent note that even if Congress passes new legislation, none of the proposals would impact the nuclear deal or Iranian crude exports.

“Congress will steer clear of violating the JCPOA,” Rapidan said.

But Hedgeye Research Group analyst Joe McMonigle is skeptical that Trump is willing to give Congress more time.

“I think the trend is looking like he is not going to waive sanctions again,” he said. “One of the things he hates more than anything is the fact that US law requires him to certify a deal and waive sanctions on a deal that he views as terrible, the worst, one-sided, an embarrassment.”

McMonigle said Trump’s advisers are hoping he will roll over the agreement and give a legislative fix more time to work.

But the president has his own views, as demonstrated by eight tweets since the start of domestic protests against the Iranian regime began just before the new year.

“I think he actually wants the deal to collapse,” McMonigle said, adding that the two times Trump waived sanctions were before he decertified Iranian compliance.

“Once you decertify the deal, it becomes hard to waive sanctions again,” he said. “I also think the protests in and of themselves also make it difficult to see the status quo of the Iran deal continuing, when you consider Trump’s decertification, his sharp rhetoric and also the fact that this was one of the major themes of his presidential campaign.”

McMonigle estimated that as much as 800,000 b/d of Iranian crude could be removed from the market and spike oil prices if the deal is scrapped.

PRESERVING STATUS QUO

Richard Nephew, principal deputy coordinator for sanctions policy at the State Department during the Obama administration, sees four options for Trump’s latest decision on Iran.

He said Trump could keep the status quo by continuing to waive sanctions while putting pressure on the Iranian government and others to improve the terms of the JCPOA.

This scenario would have no impact on energy markets but would keep the Iran deal debate alive for the rest of the year.

Or Trump could turn up the heat by setting a deadline for waiver termination, which would continue to chill energy investment in Iran and reduce Iran’s incentive to continue to comply with the JCPOA, Nephew said.

This option “would have the benefit of increasing the pressure on Congress and the international community to ‘fix’ the problems identified without jumping over the precipice at this particularly unsettled time in Iran,” Nephew said in a recent paper published by Columbia University’s Center on Global Energy Policy, where he is program director for economic statecraft, sanctions and energy markets.

SEVERE MARKET REPORT

Nephew said Trump can always “set fire to the kitchen” by terminating the waivers. This option would bring substantial market turmoil, as few in the energy trading community expect this to happen as soon as mid-January and have therefore done little planning to respond to it.

Trump’s fourth option, as Nephew sees it, would be to announce a decision to terminate the sanctions waivers, but set it in the future.

“As with other sticky political problems ?, the president could elect to look tough now but make an offer to resolve the situation in the future, provided additional concessions are made by interested parties,” he said. This would also have a major market impact.

“Markets have essentially accepted the use of waivers as less than ideal, but not destabilizing enough to avoid Iran altogether,” Nephew said. “In this scenario, however, the market reaction could be severe, as companies and banks decide that the most likely outcome of the process is not more of the same, but rather a complete change in the status of the JCPOA and sanctions relief.”

Nephew said he thinks Trump will keep the status quo this time, given that his advisers remain the same as the October decision.

But at some point, that will break down ? either because of Trump losing patience with Congress or a reshuffling of his advisers.

And that uncertainty will continue to limit investment and long-term energy deals with Iran.

“That to me is the big problem. From the moment Trump got elected, those uncertainties in the market and those uncertainties among investors — even if Trump doesn’t do anything affirmative to damage the JCPOA — those uncertainties do so much to damage it,” Nephew said. “Frankly he doesn’t have to do anything if he wants the JCPOA to die eventually, as long as he continues to generate these uncertainties.”

Source: Platts

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