Low oil prices have cut US production by nearly one million barrels a day from its high in April of 2015. But thanks to the Iran nuclear deal and lifting of sanctions, Iran's production has increased by about 900,000 barrels a day (b/d) and essentially replaced US production declines. As a result, the global supply glut and low prices have continued.
Hillary Clinton has indicated that she supports the Obama negotiated deal with Iran and would continue with the policy.
However Donald Trump has vowed to tear up the "disastrous" Iran nuclear agreement early in his term and would seek to "renegotiate a better deal." The result would be the re-imposition of US sanctions on Iran making Iranian crude exports radioactive again. Trump could do this by a simple executive order although he would also likely have bipartisan support from a majority in Congress.
Therefore a Trump win could result in removing about 1 million b/d of Iranian crude from global oil markets boosting oil prices and spurring US production.
The Obama Administration has maintained that whatever the election outcome the nuclear deal will survive because of international pressure and argues that European countries would not join the US in reestablishing sanctions.
While we agree that European governments will probably not join the US in re-imposing sanctions, we think it is all but certain that European companies and banks will not want to cross US sanctions. Therefore, nuclear sanctions would be effectively be reinstated in Europe where Iran says its crude exports equal about 700,000 b/d. Japan (200,000 b/d) and South Korea (290,000 b/d) would also likely honor US sanctions.
Before sanctions were lifted, Iran was exporting about 1 million b/d mainly to China and India and a few other nations but the US did not oppose these exports while nuclear negotiations were on-going. It’s unclear whether China and India would abide by any renewed sanctions imposed unilaterally by a Trump Administration. Iran says it is exporting about 600,000 b/d to India and 550,000 b/d to China.
Despite Trump’s campaign position on the Iran deal...
... we think when faced with intelligence assessments he will find himself with no choice but to give the agreement more time. If he walked away from the deal, Iran will have all the benefits and oil revenues from the deal as well as an excuse to re-start its nuclear program. A new US President is probably boxed in on the Iran deal.
If you recall President Obama abandoned many campaign promises from 2008 after he took office, such as closing Guantanamo and immediately pulling out US troops from Iraq and Afghanistan. We see a similar situation with Trump on the Iran deal.
Still, Trump has proven that he is a wild card so there is considerable geopolitical risk for the Iran deal.
As part of a recent HedgeyeTV series on how the Presidential election will impact financial markets, I sat down with Hedgeye CEO Keith McCullough to discuss energy policy impacts on the energy sector and oil markets. Click on the video link below to see the entire interview.
CLICK HERE to watch.
