As expected, President Trump decertified the Iran Nuclear Deal today saying that “Iran is not living up to the spirit of the deal.” In speech from the White House, Trump outlined a new strategy today to address what he called the “controversial” and “one-sided” Iran Nuclear Deal that was “purely a short term and temporary delay in Iran’s path to a nuclear weapon.” If renegotiations do not produce results, Trump said "the agreement will be terminated."
Therefore, we see about a 2-3 month period for potential Congressional action as well as international diplomacy led by the EU. However, Iran seems highly unlikely to negotiate or make any concessions. As a result, we believe US sanctions on Iran's crude exports, as well as insurance and shipping sanctions, are likely to be reimposed in early 2018. This is the biggest geopolitical catalyst for higher oil prices in years.
Here’s what investors need to know from today’s decertification:
- Trump views this as a kick off of renegotiations of the deal – even if some allies and Iran say there will be no renegotiation. “I am announcing that we cannot and will not make this certification. I am directing my Administration to work closely with Congress and our allies to address the deal’s serious flaws,” Trump said. He cited as flaws to be fixed as: sunset clauses, insufficient enforcement and Iran’s ballistic missile program.
- Several times in the speech Trump stressed working with Congress and our allies on fixing the Iran deal. In our view, Trump is referring to the two parallel stages we outlined in our note last week: 1) Congress considers additional sanctions in the next 60 days on an expedited basis that is not subject to a Senate filibuster; 2) our EU allies take the lead in trying to mediate a resolution between the US and Iran.
- Sanctions are not automatic but are likely if the Congressional or EU efforts do not produce results. Trump views US unilateral pre-nuclear deal sanctions (oil, airplane sales) as leverage to get Iran to renegotiations. Trump’s world view is transactional and so we believe he would take a deal if one can be produced. However, Iran seems unlikely to want to make any concessions or even negotiations because they also believe they have leverage with the potential to restart the nuclear program.
- He announced Treasury sanctions on Iran’s Revolutionary Guard Corps (IRGC) but this is just the start. Trump directed the Treasury Department to impose immediate sanctions on the IRGC and its officials, agency and affiliates. These sanctions will anger Iran’s government. Many of Iran’s companies have ownership stakes or other affiliations with the IRGC so this may have some immediate economic impacts but probably not on oil exports. IRGC sanctions should be viewed as the start of sanctions and not the end point.
- Trump twice made it clear that if these serious flaws in the deal are not addressed, he will cancel the deal and re-impose sanctions. “In the event we are not able to reach a solution working with Congress and our allies then the agreement will be terminated. It is under continuous review and our participation can be called by me as President at any time,” Trump said. This is an important and under-appreciated point. The President has executive authority to re-impose sanctions regardless of what Congress may or may not do.
- Trump is focused on oil revenue. During the speech, Trump highlighted Iran’s economic benefits from the “one-sided” deal in the form of oil revenue and unfrozen foreign cash assets. In our view he is focused on oil revenue to Iran. US sanctions on Iranian crude exports will have an impact on global oil prices. Since nuclear sanctions were lifted, Iran has added about one million barrels a day of crude exports to global markets. While the EU has said it will not go along with unilateral US sanctions, European energy companies have major economic exposure in the US and will be forced to stop buying Iranian crude. We also expect Japan and South Korea to honor sanctions. The wildcard is China, and of course, Russia. In addition, future US sanctions will also target insurance and shipping sectors that will also be a big deterrent on Iranian crude sales. We believe oil and related sanctions are likely to be imposed in early 2018 in the absence of any new deal and higher oil prices will follow.
For more in-depth analysis on the Iran deal and impacts to the oil sector, please see our previous note from last week.
In addition, here is a replay of our flash call from last week.
