As Republicans gather this week in Cleveland, there will be considerable talk about energy issues – support for hydraulic fracturing, coal, natural gas, LNG and overall US energy independence. While Donald Trump has not provided many specifics on his energy plans, there is a solid consensus that his administration would be favorable to fossil fuel energy sectors with very little downside risk for investors.
However, there is an emerging election risk to energy markets and that is Trump’s pledge to nullify the Iran nuclear deal.
It would be especially disruptive to oil markets as Iranian crude exports have regained significant market share in recent months. The International Energy Agency (IEA) said last week that Iran’s crude production rose to 3.66 million barrels a day in June and 750,000 barrels a day since January when international nuclear sanctions were lifted.
Re-imposing US sanctions could put much of this new Iranian crude exports on the market at risk.
This is not some crazy Trump idea either. In fairness, the Iran nuclear deal is one issue on which Trump is aligned with Republican orthodoxy as all of the Republican presidential candidates as well as nearly all Congressional Republicans opposed the deal.
But Trump has been the most aggressive in disparaging the deal on the campaign trail. In his famous foreign policy interview with the New York Times earlier this year, Trump called the Iran deal “a disaster” and said Obama should have made “a good deal.” So perhaps Trump is not necessarily opposed but thinks he could have gotten a better deal.
Hillary Clinton, on the other hand, has made supportive statements regarding the Iran deal, and we would expect a future Clinton administration to uphold it. There will be a great deal of pressure on her to preserve what is viewed by Democrats as a premier foreign policy achievement by President Obama. We suspect this is her personal view as well since the secret talks with Iran started while she was Secretary of State and involved one of her top aides. However, it also should be noted here that the Saudi leadership believes Hillary Clinton will be tougher on Iran than the Obama Administration.
In addition to Trump, there remains significant opposition in Congress to the nuclear deal. On July 7, the House of Representatives passed the Financial Services appropriations bill that contained a provision blocking the $25 billion Boeing deal with Iran Air. The plane deal was a critical part of the Iran negotiations as Iran desperately wants to upgrade its commercial aviation industry after years of sanctions. While it’s unlikely to pass in the Senate and President Obama is certain to veto the legislation, the vote demonstrates Congress’ continued commitment to undo the deal.
Supporters of the nuclear deal believe that international pressure will preserve the deal no matter who wins the White House. They say the Europeans and Russians will not join a US effort under a Republican Administration to walk away from the deal so re-imposed US sanctions would be ineffective.
In our view, this is a pretty significant miscalculation. Many European companies are already cautious about doing business in Iran out of concern about violating other US sanctions still in effect. If US nuclear sanctions were reinstated, international companies would have to decide between doing business in Iran or the US. The financial penalties alone will be a huge disincentive on Iran business, as evidenced by the $8.9 billion fine the US Treasury Department charged France’s BNP Paribas bank last year for an Iran-related violation.
Some observers also believe that Democrats will win the majority in the Senate, and therefore can prevent Trump from sinking the Iran deal. However, the sanctions can be re-imposed via executive action – the same way President Obama lifted the sanctions. Moreover, there are many Democrats in Congress who oppose the deal but only voted for it with extensive caveats out of deference to President Obama.
Despite the campaign rhetoric, we do not believe it is a certainty that Trump will undo the Iran deal. After President Obama took office in 2009, he had to abandon several campaign pledges on removing US troops from Iraq and Afghanistan after meeting with intelligence and Pentagon officials. We suspect Donald Trump will be faced with the same realities. By January 2017 so much of the Iran deal will have been implemented that it will be tough to nullify. Iran has received unfrozen cash assets and new revenues from oil exports that have recovered to pre-sanctions levels. We think a Republican President may have no choice but to give it time.
However, much will depend on Iran’s compliance under the agreement as well as other non-nuclear related activities. It is not inconceivable that some future Iran misbehavior will cross a line and trigger a US response with snap-back sanctions. Indeed, a German intelligence agency disclosed in a report released in late June that Iran had pursued trying to acquire technology for nuclear weapons purposes even last year when the nuclear deal was signed.
