In line with our Hedgeye forecasts, The Washington Post reported today that President Trump plans to decertify the Iran nuclear deal next week. According to the Post and other media outlets, the President will give a speech next Thursday, October 12 to outline the case for the US pullout of the Iran deal as well as a broader policy for the Middle East.
The President told military leaders at a White House dinner meeting tonight that “Iran has not lived up to the spirit of the deal.” (Source: pool report.)
NOTE: Get more insights on the US pullout of the Iran nuclear deal at the Hedgeye Energy Conference on October 11, the day before the Trump speech. We will have a great lineup of speakers to discuss the implications of the US decision on Iran, including the US Deputy Energy Secretary and former OPEC President. Click here for more details or contact to RSVP and reserve your spot.
In a speech to the United Nations General Assembly last month, Trump called the Iran deal “the worst”, “one-sided”, “an embarrassment to the United States”, and “cover for the eventual construction of a nuclear program.”
Under US law, the President is required to certify to Congress that Iran is abiding by the “Joint Comprehensive Plan of Action” (JCPOA) and that the Iran deal is “in the national interest.” The next certification report is due on October 15.
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.
Just last month we wrote that “the Trump Administration will deny Iran’s certification and exit the deal on or about October 15.” We also forecasted that US sanctions will ultimately be re-imposed on Iran 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.
Therefore, if the US re-imposes nuclear sanctions -- as we expect -- 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.
But US sanctions are not automatic with Trump’s decertification. We think there will be two subsequent stages that will take place in parallel before sanctions are re-imposed.
First, under the Iran Nuclear Agreement Review Act of 2015 (INARA), there is a 60-day period after the President decertifies Iran that Congress has to introduce legislation to re-impose sanctions. Under the law, the legislation must be considered under an expedited process and is not subject to a Senate filibuster.
We think Trump would prefer Congress to pass legislation to re-impose sanctions and get in the anti-Iran boat with him but under the law Congress could also decide to do nothing. In addition, while we believe there is strong bipartisan Congressional support to get tough on Iran, Congress could also decide to re-impose limited sanctions and not the full pre-deal nuclear sanctions.
However, there is one crucial fact that gets overlooked or underreported about the Iran deal: the President has executive authority to re-impose nuclear sanctions on Iran if Congress fails to act or regardless of Congress’ response. As with other issues, we think the President will have limited patience for congressional inaction.
The second parallel stage that we expect after decertification is an urgent effort by the European Union to engage in diplomacy and play a mediator role between the US and Iran to try to resolve the issue. We believe this effort could bear fruit if the Iranians are so inclined. Our view is that Trump thinks about issues in a transactional sense, and therefore, we believe the President would be willing to take a deal here. But a deal requires a renegotiation of the JCPOA and further concessions by Iran, and this seems highly unlikely to us.
We think Trump will give the European diplomatic effort about two months to explore this mediator/renegotiation phase. We ultimately believe it will be unsuccessful, and therefore expect US sanctions to be re-imposed either by Trump or Congress by the end of the year or in early 2018.
While EU governments have stated they will not go along with a unilateral US action to re-impose 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. Moreover, should Iran respond by restarting its nuclear program, the EU will be under enormous pressure to join with US sanctions to isolate Iran.
