Some are joking that you can smell the jet fuel in Washington today. With tax reform legislation and government funding completed, Congress and the President are jumping on airplanes to head out of town for the holiday break. But a major policy decision with big implications for oil markets will be front and center early in the new year.
On January 12, 2018 President Trump must again decide whether to waive US sanctions on Iranian oil exports, and we believe there is an increased likelihood that Trump will not issue a waiver. While Trump has reluctantly issued prior sanctions waivers on May 18 and September 14, those deadlines occurred before the President decertified the Iran Nuclear Deal on October 13.
In 2011, Congress imposed sanctions on Iran’s oil exports in the FY 2012 National Defense Authorization Act (NDAA P.L. 112-81, Section 1245 (d)(5)). The law provided the President with the ability to waive sanctions every 120 days if it is in the national security interest. An outright repeal or amendment of the sanctions would require congressional action. Since there was not sufficient support in Congress for the Iran Nuclear Deal negotiated by the Obama Administration, congressional repeal of this provision was not possible. Therefore President Obama used his executive authority under the law to waive oil sanctions on January 18, 2017 just before he left office.
While US law allows for a Presidential waiver for Iran oil sanctions, the Joint Comprehensive Plan of Action (JCPOA) requires it. The lifting of oil sanctions is one of the major components of the nuclear agreement with Iran, and therefore, a US refusal to issue another waiver would not only impact oil markets but would likely see the deal unravel.
Like the US law requiring waiver sanctions every 120 days, the 2015 Iran Nuclear Agreement Review Act (INARA) requires the President to certify Iran’s compliance under the JCPOA every 90 days.
President Trump has been frustrated that he is required under the law to certify and waive sanctions for an agreement that he views as the “worst”, “one-sided”, “an embarrassment to the United States”, and “cover for the eventual construction of a nuclear program.” As a result, Trump told his national security team in a July 18 meeting that he would only certify the Iran deal at the July deadline on the pre-condition that Administration develop a plan to exit the deal. Since then, Trump delivered a tough anti-Iran nuclear deal speech at the United Nations in September and then decertified the nuclear deal on October 13.
Trump’s decertification of the nuclear deal under INARA triggered a 60-day period for Congress to consider legislation on a fast-track basis that has the additional benefit of not subject to a Senate filibuster. Trump also hoped his decertification would prompt European allies to be cooperative and kick off renegotiations of the deal. To date, neither has happened.
On the legislative front, Senators Bob Corker and Tom Cotton have developed legislation that strengthen the deal (from the US viewpoint) by requiring additional compliance measures on ballistic missiles and the post-2025 period after the deal concludes. Corker and Cotton never believed it would be possible to act within the 60 days prescribed and additionally felt such a measure would need bipartisan support and attract at least 60 votes in the Senate. But unfortunately, Senate Democrats led by Senator Ben Cardin, the ranking member on the Senate Foreign Relations Committee, have rebuffed efforts to develop new Iran legislation in order to preserve the Obama nuclear deal.
We believe President Trump has conveyed some support for the legislative effort and the White House has indeed worked closely with Cotton to develop acceptable legislation. We’re told Trump’s national security team spent time on Capitol Hill this week with the key leaders on the Foreign Relations Committee on the Iran nuclear deal. In addition, Deputy Secretary of State John Sullivan has been dispatched by the White House to engage with allies on addressing the deal’s flaws. The Administration’s hope is that European officials would help persuade uncooperative Senate Democrats to get on board with the legislative effort and signal to Iran that additional measures are needed to salvage the deal. France’s Foreign Minister was in Washington this week and met with Senators Corker and Cardin.
All of this seems a bit of a last ditch effort to us. Trump had hoped that renegotiations would have kicked off in the two months since he decertified the deal. We believe he has become increasingly impatient with the lack of progress in Congress and in talks with our allies. It seems unlikely that there will be some major development in the next 20 days that would convince Trump that he should again waive sanctions. Therefore, we will be expecting Trump tweets on Iran during the next two weeks as a sign that the waiver is at risk.
As we wrote in an October 13 client note, “we believe US sanctions on Iran’s crude exports, as well as insurance and shipping sanctions, are likely to be reimposed in early 2018.”
While the foreign policy community consensus is that Trump will not exit the Iran deal because it would create another crisis as we confront the situation with North Korea, we advise investors to take Trump at his word. Many dismissed his promises regarding withdrawing from the Paris climate accord, decertifying the Iran deal and recognizing Jerusalem as Israel’s capitol but Trump has followed through on each. He has also aligned the US closer with Saudi Arabia and Israel on foreign policy matters.
When he decertified Iran’s compliance under the nuclear deal, Trump twice made it clear that if the deal’s serious flaws were not addressed, he will cancel the deal and reimpose 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 our President at any time,” Trump said on October 13.
Renewed US nuclear sanctions on Iran will be the biggest geopolitical catalyst for higher oil prices in years. When sanctions were lifted in 2016, Iran added about 1 million barrels a day (b/d) of crude exports to global markets. Therefore, if Trump does not issue another sanctions waiver on January 12, Iranian crude exports of at least 800,000 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 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 and would immediately be at risk. Additionally, due to the North Korea situation, the US would lean hard on South Korea and Japan, who previously had exemptions from sanctions, to honor renewed oil 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.
We believe Trump’s NSC and State Department leaders are advising the President to not refuse another waiver on January 12 but to give the legislative effort and diplomacy additional time. But they also opposed the decertification decision, and we believe there is considerable risk Trump will ignore their advice again this time.
However, a White House showdown on the Iran deal on January 12 may trigger an alarm to Congress and our European allies that Trump is serious. As a result, we do think there could be a compromise scenario that buys the deal another 120 days.
On January 13, Trump is once again required to certify Iranian compliance due under INARA. We certainly expect him to again decertify the deal but each decertification triggers another 60-day period that would provide Congress with another two months window to move legislation and for allies to engage in renegotiations over the deal.
While we are not sure Trump is patient enough to allow another two months for the “one-sided” Iran deal to be fixed, we are quite certain he will not agree to waive sanctions again without a fix in another 120 days when the next waiver deadline arrives on May 12, 2018. Another decertification on January 13 may be the last chance to salvage the Iran deal.
