Editor's Note: Below is a brief excerpt from an institutional research note written by Senior Energy Policy analyst Joseph McMonigle. Email sales@hedgeye.com to read our Energy Policy research.
As the window begins to close on a congressional or diplomatic fix for the Iran Nuclear Deal, President Trump must again decide whether to waive US sanctions on Iranian oil exports at the next statutory deadline on January 12, 2018.
We believe there is an increased likelihood that Trump will not issue the waiver. Although Trump has reluctantly issued prior sanctions waivers on May 18 and September 14, those deadlines occurred before the President decertified the Iran deal on October 13.
While US law allows for a 120-day 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.
Similar to 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.
Why Now?
President Trump has been frustrated that he is required under the law to repeatedly certify and waive sanctions for an agreement that he personally 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 reluctantly agreed to certify the Iran deal at the July deadline on the pre-condition that his national security team develop a plan to exit the deal. Since then, the Iran deal portfolio moved to the White House, and Trump delivered a tough anti-Iran 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 kick off renegotiations of the deal. To date, neither has happened.
We believe the President 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 watching closely for Trump tweets on Iran during the next two weeks as a sign that the waiver is at risk.
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.
The Impact on Oil Prices
Renewed US nuclear sanctions on Iran will be the biggest geopolitical catalyst for higher oil prices in years. Since sanctions were lifted in 2016, Iran has 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.
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 long-shot compromise scenario that buys the deal another 120 days.
On January 13, Trump is once again required to certify Iranian compliance due under INARA, and we certainly expect him to decertify the deal. Under the law, each decertification triggers another 60-day period that would provide Congress with another two-month 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 that without a fix he will not agree to waive sanctions again in another 120 days on May 12, 2018. Another Trump decertification on January 13 may be the last chance to salvage the Iran deal.
