Trump’s UN speech is latest signal of impending US exit from Iran nuclear deal. We believe mid-October decision is catalyst for move that will remove at least one million barrels of Iranian oil from global markets.
In his speech to the United Nations General Assembly today, President Trump once again made clear his opposition to the Iran nuclear deal. Calling it “the worst”, “one-sided”, “an embarrassment to the United States”, and “cover for the eventual construction of a nuclear program”, Trump added “I don’t think you’ve heard the last of it – believe me.” The White House web site has a transcript of the Presiden't full remarks here.
The President’s UN speech is the latest signal of the impending US exit from the Iran nuclear deal. While the official position is that the US is conducting a policy review on Iran policy and the nuclear deal, we believe the decision to exit has already been made.
The deal comes up for the quarterly certification of the parties compliance in mid-October.
Hedgeye energy policy subscribers and regular consumers of our analysis will note that we have written extensively on the topic and made the call on the Iran deal exit as far back as July 2016. Here are a few of our key past notes:
- July 19, 2016 – Iran nuclear deal emerging as a potential election risk for energy markets
- December 28, 2016 – Oil Alert: Trump signals beginning of the end of “horrible Iran deal”
- May 26, 2017 – Donald of Arabia: Trump’s successful Middle East trip raises risk to Iran nuclear deal and oi market
We believe the Trump Administration will deny Iran’s certification and exit the deal on or about October 15. We expect US nuclear sanctions will be reinstated shortly thereafter.
Renewed US nuclear sanctions on Iran will result in major implications for oil markets. When sanctions were lifted in 2016, Iran added about 1 million barrels a day (b/d) of crude exports to global markets.
If the US were to walk away from the deal and re-impose nuclear sanctions, Iranian crude exports of at least the recently added 1 million b/d would likely be removed from the market and thus spike oil prices.
While EU governments have stated they will not go along with a unilateral US action to reimpose sanctions, European energy companies with increasing US economic exposure would not risk violating US sanctions. Most of the new Iranian crude exports have been sold to Europe but the US would lean hard on South Korea and Japan to also honor the sanctions. Even exports to China and India would come under increased pressure. Renewed US sanctions would have the effect of global sanctions.
There will be a great deal of public discussion about the certification process in the coming weeks. Frankly, we think there has been too much focus on certification since the US could just decide to exit the deal as a general policy matter. However, the Administration has decided to use decertification as its rationale to exit the agreement.
When the agreement came up for certification in July, the President resisted giving his approval and only relented at the urging of his advisors during an all-day meeting at the White House. In return, the President tasked his national security team to develop a plan to decertify at the next quarterly certification (October). In addition, the White House and National Security Council has taken control of Iran policy from the State Department and is driving Iran decision-making.
We fully expect that the other parties to the agreement, the so-called P5+1 (permanent members of the UN Security Council – Russia, China, France, United Kingdom; and Germany and the EU) will certify Iran’s compliance next month as per the narrow confines of the Joint Comprehensive Plan of Action agreement (JCPOA).
The US will contend that Iran has failed to allow inspections of military sites as a major reason for decertification. In addition, the President and other national security officials want to consider Iran’s broader activities to destabilize the region, ballistic missile program and support for terrorist groups as part of certification (something Iran strongly opposed during negotiations).
Sanctions are not automatic upon exiting the agreement but we fully expect the Administration to reinstate the prior US nuclear sanctions. The President himself has executive authority to reinstate sanctions so no action is required by Congress to do so. In fact, we believe the President will receive wide bipartisan support for re-imposing stronger sanctions on Iran.
As previously discussed, the EU will likely not join the US in re-imposing nuclear sanctions but EU energy companies, with big US operations, that buy Iranian oil will be subject to US sanctions and create a major obstacle for the EU policy position. Moreover, should Iran respond by restarting its nuclear program, the EU will be under enormous pressure to join with US sanctions to isolate Iran.
EVENT REMINDER – HEDGEYE ENERGY POLICY CONFERENCE OCT 11: More on Iran, oil markets and OPEC at the Hedgeye Energy Policy Conference, October 11 in New York City. Confirmed speakers include: US Deputy Secretary of Energy and former OPEC President. Get details here.
